Tips for Rebuilding Credit After Bankruptcy

Many Connecticut residents could see substantial relief from their debts by filing for bankruptcy, but they don’t because they are afraid doing so will destroy their credit. Here’s what you need to know about what a bankruptcy discharge will do to your credit rating, and how you can rebuild your credit after the bankruptcy is over.

What Happens to Your Credit When Your Bankruptcy is Discharged?

Every adult in the U.S. has a FICO credit score. This is a number between 300 and 850 that is designed to estimate how big a risk you pose to potential lenders. Your FICO credit score depends on several factors, including how much debt you have and how faithfully you have paid off past debts. Failure to make payments on time, collections efforts, and frequent credit inquiries can all lower your credit rating, so does filing for bankruptcy. A bankruptcy petition can reduce your credit score by 150 to 200 points. The lower your credit score was before filing, the less the impact will be.

It’s important to understand that that impact will also fade over time, and, in most cases, credit scores start to improve right away. A Chapter 7 bankruptcy will remain visible on your credit history report for 10 years. However, the practical effects of the bad debts discharged in that proceeding usually begin to drop off your credit score almost immediately. In fact, while each person’s case is different, some Connecticut bankruptcy petitioners have seen their credit scores rebound into the 700s within a year or two after discharge.

If you file a Chapter 13 bankruptcy, the process itself takes longer – generally 3 to 5 years from filing to discharge. If your chapter 13 plan pays credit card and other unsecured debt in full, a Chapter 13 bankruptcy only stays on your credit report for 7 years after the petition is filed instead of 10.

When to Start Rebuilding Credit After Bankruptcy

Rebuilding your credit after bankruptcy is the key to minimizing its impact on your ability to borrow money in the future. Many people who file for bankruptcy swear off all borrowing out of fear that they will end up in the same position again. However, some costs simply can’t be avoided. If you want to buy a new home, are sending your kids off to college, or end up facing a serious medical situation, you will need access to the borrowing power a strong credit score provides.

To get there, it is important to make strategic use of debt to rebuild your credit in the months and years after your bankruptcy is over. Don’t wait until the bankruptcy disappears from your credit history to start building a new reputation as a reliable borrower. You may be able to begin the credit building process as soon as your discharge is final, if not before. In some Chapter 13 cases, Connecticut petitioners can even ask the bankruptcy court to take on new necessary debts – like a car loan – while they are still completing their payment plan.

Best Ways to Build Credit After Bankruptcy

The best way to build credit after bankruptcy is to have a plan for how you will use debt and to limit your borrowing to what you can afford to pay off each month. This will allow you to develop a strong credit history of recent payments, which will soon outweigh the negative impact of the bankruptcy petition itself. Here are some steps you can take:

Step 1: Get a Copy of Your Credit Report

You can get a free credit report from each of the three credit reporting agencies each year. Pull your report after the bankruptcy is filed and another a few months after your case is discharged. Make sure each discharged debt’s balance is $0, and none are still listed as delinquent. If they are, you can request that the creditor update their records.

Step 2: Continue to Pay Your Mortgage or Long-Term Debts

How long you maintain credit matters to the credit bureaus. Federal and Connecticut state law prohibits foreclosure and repossession, even when the underlying obligation is discharged in bankruptcy, as long as you keep your mortgage or auto loan current. Some banks and mortgage holders will ask you to sign a “reaffirmation agreement.” While these agreements are common in other parts of the country, they are rare in Connecticut, and local bankruptcy judges generally won't approve them based on existing bankruptcy and state laws. What is important is that you stay current on your debt to avoid new collections issues.

Step 3: Sign Up for a New Credit Account

After a bankruptcy, you want to start to rebuild your credit by making responsible use of debt. Many bankruptcy petitioners report being deluged with unsecured credit card offers even before their discharge enters. They have relatively high interest rates, of course, but there is no need to use “secured” credit cards (where you pay up front for the privilege of maintaining the card). By signing up for a single unsecured credit card, using it and paying it off regularly, you can begin to develop a good credit rating quickly after your bankruptcy is concluded. As a practical matter, most people need to have at least one credit card, or a debit card, for a variety of routine situations, like reserving a hotel room, rental car, or plane ticket.

Step 4: Pay Bills Early or On Time

Next, get out your calendar (or calendar app) and write down every due date for a utility bill, debt, rent payment, or mortgage payment. Pay every bill as it comes due at the latest, remembering to account for time in the mail. If possible, set up for automatic payments or schedule digital fund transfers through your bank. This will develop a pattern of on-time payments that shows you are trustworthy.

Step 5: Work with Cosigners for Larger Loans

If you need to borrow more money, such as a car loan, before your credit score supports it, you can ask a relative to co-sign on the debt. That means if you don’t pay the balance, they will be responsible for it. However, as long as you can maintain your payments, they won’t have to do anything about the debt, and the lender usually won’t even look at your credit when making their decision. Car dealers in particular are usually eager for loans to be approved.

Step 6: Get an Unsecured Loan, and Keep it Paid Off

Once you qualify for an unsecured credit account, get one, and only one. Set a budget for how much you put on the card, and then pay the balance down to $0 every month. This will help you build good credit that will cover the negative effect bankruptcy can have on your credit score.

Get Help Facing Bankruptcy from Start to Finish, and Afterwards, Too

At Lawrence & Jurkiewicz, we focus our practice on helping people. We know that you may be nervous in deciding whether to file for bankruptcy, and we want you to know that a bankruptcy petition isn’t the end. Instead, it allows Connecticut residents to turn a page on overdue bills and old debts and start fresh, building new credit and opening doors to new opportunities. Please contact us for a free consultation.