Rebuilding after Bankruptcy
Bankruptcy is like a divorce from your debt. You will feel freedom and relief after letting go of the weight of an unmanageable debt load, but it hits like a wrecking ball on your credit score.
Even though bankruptcy will stay on your credit for several years, you can work on repairing your credit and avoid doing anything to damage it while those years pass. That way, when it falls off your report, you will be in the best position to do things like buying a home. The length of time a bankruptcy stays on your credit report depends on whether you filed chapter 7 or chapter 13 and is determined by your state’s law. Your bankruptcy attorney can give you guidance on the exact timing of your case.
Follow these steps to build and repair your credit during and after your bankruptcy filing.
1. Pay Bills on Time or Early
Paying your bills late costs you money in penalties and brings your credit score down significantly. Prioritize paying your creditors on time or early if you can. Set up automatic payments to stay on track more easily. It takes time to set them up, but once arranged, they will save you time and ensure you won’t forget to pay a random bill.
2. Check Your Credit Score Regularly
You can obtain a free credit report annually, and you should do so to ensure that the report accurately reflects each transaction. If you note any inaccuracies, dispute the misinformation with the credit bureau. Since there are three national credit bureaus (Equifax, Experian, and TransUnion), you should contact each of them regarding any mistakes in your report. Like any goal worth achieving, this can take some time and effort on your part, but you will find the results highly worth the effort.
3. Use It or Lose It
You have to use credit (wisely) to build credit. You may not qualify for all types of credit due to your bankruptcy. You will need to figure out what kind of credit you have available to you. You should then obtain credit and use it strategically. You might get a small car loan or apply for a secured credit card. Get creative, and find a way to establish and build credit.
The most important thing is to use it over a period of time and make sure your all payments arrive on time during the repayment period. Stay within your means to avoid getting behind on payments or paying late. It is okay to use credit even if you have the money to pay in full. In fact, this is the best-case scenario. Start small, and keep it simple. Avoid financing large purchases at high-interest rates.
Once you pay your debt in full, evaluate the types of credit now available to you based on your current credit score. You can keep doing this year after year. You should find that by taking good care of your finances, you can qualify for lower interest rate credit and higher credit limits.
4. Maintain a Simple Budget
Budgets don’t have to feel overly burdensome or complex. You should make your main goal to spend less than you earn. You don’t need spreadsheets or complex and costly software like QuickBooks to maintain healthy finances. You can open a notes file on your phone and create a list of all your financial obligations each month and year. Don’t forget to account for one-time payments and estimate projected taxes and medical costs.
Next, make a list of your income from all sources. If your current income does not exceed your current expenses, make some adjustments to your spending, or look for ways to add to your income. Side hustles like delivering food or using your skills to help people, provide great ways to create extra income, and keep your finances in balance.
Keep your budget simple so you will maintain it. When your income or expenses change, make adjustments. When you pay bills each month, take a look at your budget, and don’t forget to reward yourself for your hard work. Rewards don’t have to cost money. Do something you enjoy for free, like taking a bath or calling a friend.
Speaking of friends, enlist a budget-savvy friend to help you stay on track and keep yourself honest about your spending habits. Some people learn how to manage their finances early on, and those friends can become great allies.
5. Build a Rainy-Day Fund
Now that you have a budget in play, start working on a savings plan. Eventually, it will rain. The only way to ensure you stay out of the financial storm and maintain good credit when it comes involves having some sort of plan in place for a rainy day.
Start small with just $50 or $100 per month and build from there. Put the money where it won’t tempt you to spend it, such as in a savings account. Set up your accounts to automatically transfer a portion of your paychecks each month so you won’t have to think about it. Automating your savings makes it more likely you will stick to your plan. You won’t have to think about it each time the same way you would with a manual transfer of funds.
Make goals, and reward yourselves for hitting your savings targets.
6. Keep It Clean
Like washing your laundry or brushing your teeth, regular and repeated actions will help keep your credit clean. Calendar regular credit report checks at a certain time of the year so you will remember to keep an eye on your progress. Tie it to an event like paying your taxes or Thanksgiving (because you have a lot to be thankful for now that you find yourself out from under that debt).
You can absolutely have exceptional credit and achieve your financial goals with some effort and time. Like confidence, you build credit by taking small, successful steps toward your goals, succeeding, and repeating.
