Rebuilding Your Credit After Bankruptcy

It takes time and discipline, but the principles are simple enough

Is there life after bankruptcy?

Yes, it's possible to rebuild your financial life, but it's going to take time and vigilance.

"There is life after bankruptcy, but a person has to ask themselves what kind of life after bankruptcy do they want to have?" said John Ventura, a consumer bankruptcy attorney in Brownsville, Texas, who has written several books on consumer money and legal issues.

"Do you want to have a lot of credit in the future? Are you going to get into the same old habits? Or do you want that peace of mind of having a savings account and buying things when you can pay case for them and can afford them?"

The course of action experts recommend after a personal bankruptcy is one that all of us should follow,

  • Track your spending.
  • Trim your spending.
  • Avoid debt.
  • Be disciplined with your checking and savings accounts.

But even before that, it's important to determine what got you into bankruptcy in the first place. Was it a job loss, serious illness or divorce? Or was it simply that you didn't live within your means?

"Look back and figure out what got you there," said John Waskin, executive director of American Credit Counselors Corp., a Huntersville, N.C., credit counseling firm. he said that's the key to avoiding problems in the future.

If it's because you overspent, you need to develop a spending plan so you will be able to keep track of expenses.

"This is an opportunity for people to take a real close look at how they handle money." Ventura said. "There are a lot of people who can benefit from training about budgets and living within your means."

  • Use credit as little as possible.

"After bankruptcy, you're going to have to live and love the use of cash," said Rudy Cavazos, director of corporate relations at Money Management International, a Houston credit counseling agency. "It's going to help you save money and learn to live without the luxury items you were used to.

"If you want something, you save for it, and you get it later because you've saved for it."

But given the necessity of a credit card in today's society, you should have one - and only one - if you want to do such things as rent a car and make hotel reservations.

"Don't tempt yourself by getting one with a $3,000 credit limit and running up the balance", Waskin said. "Pay it off every month. Credit cards are a wonderful convenience if controlled."

Surprisingly, you may find yourself getting credit card offers in the mail.

"After you've gone bankrupt, you will find credit card places which will loan you money," Waskin said. "The bad news is that they're going to charge you an arm and a leg because you're a credit risk."

Lenders say that just because you receive a credit card offer doesn't mean you'll actually be approved for credit. A bankruptcy can stay on your credit record for as long as a decade.

A secured card requires a cash collateral deposit that becomes the credit line for that account. For example, if you deposit $500 in the account, your credit line is $500.

"When the bill comes in pay it off," said Howard Dvorkin, president of Consolidated Credit Counseling Services in Fort Lauderdale, Florida.

"Do not run balances. Certainly on a secured card, you don't want to be paying interest on your own money. That's ridiculous."

After you've made steady, on time payments, ask the issuer if it will convert your card to an unsecured card.

"Keep your living expenses below your income," said Jane Jolley, a Texas consumer bankruptcy attorney. "Do not rely on credit cards as extra income during the month."

Applying for too much credit too soon after a bankruptcy will scare away lenders if you do apply for a car or house loan. Dvorkin says.

Maintain a consumer debt-to-income ratio of 20 percent or less, says Jolley, who teaches a course on debtor education and credit rehabilitation to consumers who've filed for bankruptcy.

Your debt-to-income ratio reflects how much debt you're carrying in proportion to how much you're earning.

That includes payments for cars, student loans and credit card payments. Don't include mortgage rent and utilities.

To calculate the ratio, add those total monthly payments and divide that amount by your take home pay. The figure you get will be your debt load or debt-to-income ratio.

  • Cut all unnecessary spending to the bone.
    "Track your spending for at least one month, recording every single expenditure," Jolley said. "You may be surprised at how much you spend on things such as snacks at work, ATM fees, late fees on video rentals, eating out, alcohol, tobacco products and lottery tickets.

    The total you spend per month on these items may be very different than the seemingly small amount you spend day to day.
  • Start paying all your bills on time, not just credit cards. That includes your cable bill, phone bill and utilities bill.
    "People don't realize these are creditors," Dvorkin said.
  • Open a checking account and don't write checks that will bounce.
  • Learn to save, save, save.
    "Arrange your spending to make sure you save money each month." Jolley said. "Anticipate that you will need cash for deposits, down payments and emergencies."
  • Open a savings account and make regular deposits, even if they're small amounts.
    "The habit of saving every month is important," Jolley said.
  • Be patient but single-mindedly focused on regaining control over your financial life.
    "The best was to repair the credit and rehabilitate yourself is time." Dvorkin said.
    "It allows the nasty stuff to fall off overtime."
  • Apply for gas credit cards and store cards at businesses where you would normally just pay cash. Pay charges back In full each month or at least pay in a timely manner. Do not carry large balances on the cards.
  • Apply for a secured card where you deposit cash and charge against it. Pay any advances back over a two month period so that they will reflect as positive marks on your credit report.
  • If you are unable to obtain a loan on your own merits, find a relative or friend to cosign for you and pay the loan in a timely manner.
  • Find a mortgage broker or car dealer who holds himself out as "bankruptcy friendly". Attempt to purchase a used car so that you do not get hit with depreciation that occurs during the first two years of a new car purchase.
  • Stay away from payday loans that are at high interest rates and are a "bad credit" trap.
  • Write a letter to each credit reporting agency explaining the circumstances that lead to your filing. You are entitled to include a statement in your credit report explaining why you had to file bankruptcy. If circumstances beyond your control were the cause, this can only help.
  • Write to each credit reporting agency for copies of your credit report. Make sure that all of your pre­petition debts are properly notated as being discharged or paid through your bankruptcy. Make sure that none of your pre-petition debts are still being listed as delinquent, le. 90 days late, 120 days late etc. If these debts are still being notated incorrectly, you are entitled to write the credit reporting agency and contest each such debt.
  • Open a savings or checking account. Try to deposit 5% of your weekly paycheck into the savings account. Lenders may look at this to determine if you can handle money responsibly.
  • Live within your means. Remember to not unnecessarily increase your debt to income ratio by taking on credit to purchase luxury items that you DO NOT NEED.