Take these proactive steps to rebound quickly and improve your credit score.
While the prospect of restoring your credit and financial stability can feel overwhelming after a bankruptcy, it hardly compares to the negative emotions experienced before filing for one. That’s why, if you’ve survived a recent bankruptcy, you probably feel a sense of freedom with the chance to make a fresh start. However, you may also be concerned that your filing could impact your future credit score and prevent you from achieving your long-term financial goals. For this reason, you need a smart post-bankruptcy plan.
If you’re ready to repair your credit and make wise financial moves for your future, start with these strategies.
Put your bankruptcy paperwork somewhere safe.
Chances are, you want to never look at that paperwork again. But if you’re requesting a loan down the road, especially for a major purchase like a house or a business, it’s possible that a lender will request your bankruptcy petition (the information that your bankruptcy attorney put together) or the notice of your bankruptcy filing from the court. It’s also possible that a creditor could approach you, claiming you owe money that you no longer owe. Your bankruptcy forms can offer proof that you no longer owe any payments.
Begin strategizing how to rebuild your credit.
Don’t rush to apply for the first loan that you can, as that’s an easy way to fall into a pattern of getting into debt. Consider applying for a credit card or a secured credit card, which is designed for people with bad credit. With a secured credit card, you would put down a deposit, often around $200 to $300, before use. While these cards can be beneficial to restore your credit, there are some snags, including high interest rates and annual fees. Instead, think about your financial objectives. Ask yourself if there’s a way you can better manage your cash flow. And unless you absolutely need a loan right now, give yourself some breathing room — a few weeks, a few months, maybe even a few years — before you apply for one.
Understand why you got into bankruptcy in the first place.
While you’re thinking about rebuilding your credit, ask yourself if it was a temporary issue that has since been resolved, such as a job loss followed by new employment, or a permanent hardship like an illness hindering full-time employment, says Meaghan Tuohey, a bankruptcy attorney in Haledon, New Jersey. Or, consider that your financial hardship may have had nothing to do with outside forces but your own, such as poor money habits and ill-conceived decisions. In any case, “if the root cause is not addressed and dealt with, the bankruptcy will only be a temporary solution,” Tuohey says.
Establish a relationship with your bank.
When you’re ready to apply for a loan, it will help if you have a personal connection with your lenders. Michael Gerstman, a chartered financial consultant and the CEO of Gerstman Financial Group in Dallas, recommends establishing a relationship with the loan officers, and even the CEO, of a small community bank. “Tell them the story of your bankruptcy — why it happened, why filing for bankruptcy protection was necessary and why it won’t happen again,” Gerstman says. “When you are humanized and not just a file number, it will be much easier to secure a car loan, mortgage and so on for the future.”
Carefully consider whom you borrow from.
You can often find loans easily after a bankruptcy. Why? Lenders recognize you have more money available now that you aren’t in debt and you won’t be able to declare another bankruptcy to eliminate any new debt for seven years, if you declared Chapter 13 bankruptcy, or 10 years if you declared Chapter 7 bankruptcy. But here’s the catch: The interest you pay will likely be sky-high. So shop around, urges Donald Petersen, an Orlando, Florida-based consumer protection attorney who represents consumers against creditors who violate bankruptcy discharge orders. Petersen highly recommends consulting with your bankruptcy attorney. A good attorney “will be able to provide the names of mortgage brokers and, sometimes, car dealers who are more likely to offer competitive rates,” he says.
Check your credit report.
Before taking out a loan, look for inaccuracies on your credit report, says Russell Nicolet, an attorney who owns Nicolet Law Office, S.C., based in Hudson, Wisconsin. “You can pull your credit report for free at AnnualCreditReport.com,” he says, adding that you should dispute anything that isn’t accurate, like a debt that was discharged, but is still reported as if you owe money on it. This is important because if you can clean up errors on your report, your credit score may improve faster.
Make sure you’re truly ready to borrow money before you take out a loan.
After filing for bankruptcy, your credit score will take a huge hit. Now, if you take out a new loan, and you pay late, your credit score will plunge again — and it’ll be worse than during your pre-bankruptcy days, according to Petersen. “Consumers who are late even 30 days within three years after filing bankruptcy will be heavily penalized on their credit scores, much more heavily than a similarly situated consumer who did not file bankruptcy or who filed more than three years ago,” he says.
Make sure you’re budgeting well.
Obviously, you should be assessing your budget all the time, regardless of whether or not you’re planning to take out a loan. But if you’re thinking about borrowing money, and you haven’t made a budget or reviewed it in some time, do yourself a favor before you apply for a loan or credit card. Take a look at your monthly expenses and run the numbers and see how paying back this new loan will impact you.
Don’t get overconfident.
If you get a credit card after your bankruptcy, and you make payments on time, month after month, you have every right to be pleased. But don’t assume your troubles are over. As you pay off your card every month, on time, your credit card will probably raise your credit limit, Nicolet warns, and if you keep borrowing more, you could find yourself overextended and unable to pay your debts. Of course, if you’re continually tweaking your budget as you borrow more money to avoid getting in over your head, you could be just fine.
Your post-bankruptcy attitude is important.
Marie Martin, a bankruptcy attorney with Martin & Hedervare in Little Canada, Minnesota, says the main factor that helps a customer recover after bankruptcy is attitude. She says the consumers who view their bankruptcy “as a business decision,” and who try to learn from the experience are those who end up doing well. “If they view it as just another loser move in a long line of loser moves they have made, they don’t always get the maximum benefit they could from such an extraordinary opportunity for a financial do-over,” Martin says. Take this opportunity to be mindful about restoring your credit reputation and show creditors that you’re a good credit risk by making payments on time and keeping credit card balances low.
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10 Ways to Bounce Back After Bankruptcy originally appeared on usnews.com
