Tips to Rebuilding Your Credit After Bankruptcy

Debt is a bear. For many Americans, these financial struggles are not uncommon. Unemployment, divorce, medical issues, reckless spending, or business struggles, among other unique situations, can lead to crippling debt that, if left unattended, can turn life upside down.

One increasingly common and welcomed choice to rid yourself of these debts is personal or business bankruptcy. 

Personal bankruptcy comes in two forms: Chapter 7 (liquidation bankruptcy) and Chapter 11 (reorganization bankruptcy). If you have enough disposable income to put toward repaying a portion of your debts, Chapter 11 would be your best option. If disposable income is not readily available and you are struggling to pay any of your debts, Chapter 7 may be the best option.

For troubled business owners that wish to keep the business afloat, Chapter 13 bankruptcy is the way to go. Chapter 13 allows business owners to reorganize their debts to keep the business open as the owner pays off their creditors over time.

Bankruptcy and your credit score

No matter the option you choose, if you file and are accepted for bankruptcy, your credit score could drop as much as 240 points. Each filer’s situation will be unique, and while that number may sound unreasonable, there are numerous strategies you can employ to revive your credit score, such as:

  1. Pay minor debts yourself: Leave some small debts out of your bankruptcy filing if you can manage to pay it independently. This will place you in a more positive light tit creditors as long as that account gets consistently paid off.
  2. Consider a bankruptcy friendly unsecured credit card: Find an unsecured card with a low credit limit, retail store card or gas card. These types of cards are easier to get approved for but always respect the due date. Always pay your card off on time or early. If you go to the grocery store, it’s fine to use your credit card, but make sure you have the money to pay it off after each use. 
  3. Apply for a secured credit card: A secured card is a much safer option than an unsecured card since you and funding the secured card via a personal cash deposit. If you make a $500 deposit, that will become your credit limit to manage. If you continuously spend and repay your bill on time, you may be able to switch to an unsecured credit card and a raised credit limit.
  4. Activate auto-pay for needed bills: Bills like electricity and other utilities come monthly like clockwork. If you have trouble paying these bills on time, turn on auto-pay (which nearly all servicers provide) to set it and forget it. Just make sure you are budgeting and have enough money in your account to cover the automated payments.

Lastly, consider applying for a credit builder loan. Like a secured credit card, you fund the loan, so you are essentially borrowing your own money and betting on yourself. If you borrow $1000, the lender expects you to pay off that $1000 loan within 12 to 18 months. This option is maybe the best way to rebuild your credit after bankruptcy.