How To Rebuild Credit After Bankruptcy
- May 17, 2016
- Jason Kotlyarov
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A common fear for those considering filing for bankruptcy is that the bankruptcy will be a considered a “stain” on their credit report. While it’s true that a Chapter 7 bankruptcy stays on a credit report for about ten (10) years from the filing date and a Chapter 13 typically stays on a credit report for seven years from the filing date, a successful bankruptcy discharge still provides the clients a unique opportunity to rebuild their credit, even if it stays on the credit report.
Why can bankruptcy actually help my credit score?
Typically, a successful bankruptcy discharge won’t lead to an immediate boost on the credit score but this is why it will help. First, it’s important to remember that someone’s credit score is essentially a way to measure their ability to pay their debts. Someone who had their debts discharged through bankruptcy will no longer have to miss payments or make late payments on debts. Also, wiping away a lot of debts will reduce a person’s debt-to-income ratio, a key variable used to determine someone’s ability to make payments and ultimately used to help determine a credit score.
I successfully completed my bankruptcy. How do I start to rebuild my credit?
There are three key components to rebuilding your credit after bankruptcy: (1) Start creating a pattern of making monthly payments on time and using credit responsibly; (2) Get your non-dischargeable debt payments back on track; (3) DO NOT take on any unnecessary debts.
- Non-dischargeable debts are debts such as student loans and certain tax debts. Once your bankruptcy is complete you should consider making arrangements with the entities you owe money to such as setting up an offer-in-compromise is with the IRS, or a payment plan with your student loan creditor.
- MORE IMPORTANTLY, ONCE THOSE ARRANGEMENTS HAVE BEEN MADE, FOLLOW THROUGH AND MAKE YOUR PAYMENTS.
- In order to start a pattern of making timely payments and rebuilding your credit you may consider getting a secured credit card; meaning a credit card that uses money deposited in a bank as collateral. It is highly recommended that you keep a low credit limit. We often suggest that our clients obtain a card like this and only use it only to purchase one necessary item such as gas or groceries, and always pay it off on time and in full.
- Do not take on any debts you don’t need. You may start getting offers in the mail offering credit. Remember that debt-to-income ratio we were talking about earlier? This is where it comes into play. Even if you don’t use the credit but simply take it out thinking it will help you rebuild credit, it won’t. Getting into debt will not help your ability to repay debt, so ultimately it will hinder your credit score.
Every situation is different and you should speak with an experienced bankruptcy attorney to learn more about these topics and how they may apply to you.