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Building Credit After Bankruptcy and Getting Yourself Financially Back on Track

Bankruptcy is not the end of one’s financial world.  Building credit after bankruptcy can be relatively easy if you follow a sequential plan.

Two Types of Bankruptcy

Dependent upon the type of bankruptcy you filed, the methods for building your credit and getting yourself back on track differ somewhat.  If you filed Chapter 13, your creditors have settled for a reduced payment of the debt, and you have made scheduled payments to third party appointed by the court.  The payment period has probably ranged from 3-5 years, and the total debt is reduced to zero once the payment period has ended. If you filed Chapter 7, however, all debt was wiped out, and your creditors received nothing.  Obviously, Chapter 7 is a more drastic form of bankruptcy, and new federal laws have made it much more difficult for individuals with income to secure this type.

In both cases, your credit will be somewhat affected for the next ten years, for the bankruptcy appears on your credit report for that period of time.  As you move further away from the initial discharge date, however, credit can begin to be restored.

Methods for Building Credit

It is likely that, once a bankruptcy has been discharged, the debtor will receive offers for credit.  Because bankruptcy records are public, some financial institutions and automobile dealers check these records for leads in offering credit.  The reason for this is that they know an individual cannot again declare bankruptcy for seven years, and it is likely that they will be able to get paid.  On the other hand, the interest rates offered to the consumer will most likely be exorbitant.  A wise consumer treads very carefully through the credit maze after a bankruptcy.

There are specific actions that can be taken to begin to restore one’s credit, as follows:

  1. Obtain a pre-paid credit card.  These cards are offered by most banks, and bear the Visa or Mastercard Trademark.  The card holder deposits money into the credit card account and then is able to charge up to that deposit amount.  Additional money can always be deposited into the account.  The beauty of this is that the charge bill is paid on time every month, and the record of payment is reported on the consumer’s credit report.  Because the payment is always made on time, the credit score begins to rise again.
  2. Once the consumer has established this account, the next step is to take an offer for a regular unsecured credit card.  In most instances, there will be an annual fee and a smaller balance limit, because the account is riskier for the lender.  The cardholder should pay the annual fee up front, and begin to charge just a small amount each month, paying off the entire balance when the bill comes due.  Again, the credit report will reflect a credit card account that is paid on time every month, and the credit score will again rise each month.
  3. If the bankruptcy was a Chapter 13, the consumer will need to be very careful in taking any new credit.  Specifically, it is critical that the bankruptcy payments be made on time, so careful analysis of one’s income and expenses is necessary before assuming any new debt.  If there are defaults or repossessions after a bankruptcy, one’s credit it completely ruined for several years to come.
  4. As the consumer proceeds further and further from the bankruptcy discharge date, and if he/she has been responsible about all payments, lenders will begin to offer credit with higher limits and no annual fees.  Again, it is important to be conservative in accepting these offers and to watch the annual percentage rates of such cards.
  5. Purchasing a large item on time is an additional way to get back on track, because establishing a history of making regular payments over time will demonstrate a long-term responsibility that potential lenders like to see.  So, if purchasing a home is in the future, this will be an important step.  In general, mortgage lenders like to see a minimum of three trade lines on a credit report, all of which show at least one year of perfect payment history.
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