Getting Back On Track Financially After Bankruptcy

by Gary Foreman

Bankruptcy might be necessary, but it isn’t easy. Take these steps to get your finances back on track after bankruptcy and overcome those post-bankruptcy blues.

Gary,
My husband and I got ourselves in a bad position a few years ago. I lost my job and went from excellent credit to bad credit in just under three months and then we had to file bankruptcy. We couldn’t believe we had lost control of our financial future.

I know there are many people just like us with the bankruptcy blues. How can we get back to the “good standing” that we were so proud of? Is it true we will have this hovering over us for ten years? Goodbye, first home!
Carrol H.

Carrol asks a good question. And she’s right. She has plenty of company. A lot of people took a financial hit this past year.

So, let’s take a look at what it takes to regain a good credit rating.

Don’t Expect To Find a Quick Fix

The first thing Carrol needs to know is that there’s no quick fix. Avoid companies that promise to create a “new credit history” or erase accurate entries in your credit file.

In fact, if you knowingly include false information in a credit file, you’ll be breaking federal law.

According to the Fair Credit Reporting Act, the credit bureau can report accurate information on you for up to seven years (ten years for bankruptcy). But that’s not a death sentence to obtaining credit. You can begin to rebuild your credit standing immediately after bankruptcy.

Stay Mindful of Your Debt Commitments

The first thing Carrol and her husband will want to do is take a look at their use of credit.

Borrowing money commits us to repay it, whether we lose a job or have a medical emergency. So we should only commit to payments that we can make even if we are unemployed for a short time or have some other financial crisis.

Let’s face it. Some bad things happen to all of us.

Build an Emergency Fund

Part of the problem that Carrol faced was the lack of an emergency fund. And part of regaining good credit is creating that fund.

Every family should have between two and six months of normal expenses saved for unexpected hard times. For most of us, that’s not an easy thing to do. But it’s still important.

Carrol may find it best to put $5 or $10 a week into a separate savings account as soon as she gets paid, whether she feels she can afford to or not. Yes, she’ll be short on cash by the next paycheck, but it may be the only way to accumulate some savings.

It is surprising how creative we can be when we need to be. And even $5 a week will add up over time.

Related: Finding Money for Emergency Savings

Apply for a Secured Credit Card

The savings will also be necessary for the next step in our project. Once she’s accumulated $200 or so, she’s going to apply for a secured credit card. A card from a big issuer, like Capital One, or a card from an online platform, such as Chime, may have fewer fees than a card from an unknown issuer. At first, her credit limit will be the amount from her savings that she’ll use to secure the card.

The goal here is for Carrol to demonstrate the ability to pay her bills on time. So she’ll want to use the credit card each month, not for extra purchases but for essentials. Groceries are a good choice. Remember, the key here is to pay off the entire balance each month. Do not begin to carry a balance on the account.

As time passes, Carrol will begin to build up the savings account. The credit limit on her card should also be increased. That doesn’t necessarily mean she should charge more. The fact that her available credit is going up will be reflected on her credit file. The record will also show that she’s keeping the account current each month.

After about a year, Carrol can see about changing her credit card to an unsecured one. If she’s consistently made payments, the card issuer could make the switch immediately. Or she may qualify for an unsecured card from a different issuer.

Gradually Start Applying for Additional Credit

In the second year, Carrol can begin to apply for additional credit and gradually build up to a more normal status. She should only apply for one card at a time. An attempt to get numerous cards would be a mistake. Any applications that are rejected will be reflected on the credit file and will make it harder to get additional credit in the future.

After the first couple of years, it should get easier for Carrol. By then, potential lenders can see that she’s consistently paid her bills. She might even be able to get a car loan or a home mortgage without an unusually high deposit or interest rate.

Handle Your Credit Properly

The key for Carrol is to remember that the lender’s primary concern is being repaid, so a lender wants to know whether the bankruptcy was a one-time event or a sign of someone who can’t handle credit. The way to demonstrate creditworthiness is to handle it properly. The bankruptcy cloud will fade over time and Carrol’s credit-worthiness will increase.

While it will take time and effort to rebuild Carrol’s credit, it is possible. Hopefully, her money troubles are behind her and she’s on her way to a brighter financial future.

Related:

• How Families Can Overcome Bankruptcy
• Managing Your Credit Score
• Overcoming the Emotional Costs of Bankruptcy
• Personal Loan After Bankruptcy: Can and Should You Get One?

Reviewed December 2023

About the Author

Gary Foreman is the former owner and editor of The Dollar Stretcher. He's the author of How to Conquer Debt No Matter How Much You Have and has been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money, Credit.com and CreditCards.com.