The stress and worry of financial hardships such as a job loss or unexpected expenses can be overwhelming. One way to escape excessive debt and reorganize your personal finances is by filing for bankruptcy.
Nearly 400,000 Americans filed for bankruptcy in 2021 and got out from under the unbearable weight of debt. Although bankruptcy can ease your immediate financial situation, there are steps you should take to rebuild credit and ensure your financial future is secure.
How Does Bankruptcy Affect Your Credit?
Bankruptcy allows individuals and businesses to clear debt and get a fresh start. The two most common types of bankruptcy are Chapter 7 and Chapter 13. Chapter 7 bankruptcy can eliminate or discharge virtually all your debt and prevents lenders from attempting to collect any unpaid debt. Under Chapter 13 bankruptcy, you create a payment plan, and your funds are distributed among your debtors.
Your bankruptcy and discharged debts are reported to the three major credit bureaus (Equifax, Experian, and TransUnion). This reporting process is a good first step in cleaning up your credit report. Pre-bankruptcy, your debts show as delinquent or unpaid on your report. However, after bankruptcy, the debt is set to a zero balance.
Chapter 7 bankruptcy stays on your credit report for up to 10 years from the filing date, whereas a Chapter 13 bankruptcy remains for seven years.
The negative impact of bankruptcy on your credit history includes:
- Inability to secure personal or car loans
- Limits to qualifying for rental properties or utilities
- Restrictions imposed by employers due to bad credit
- Reliance on payday loans which charge very high-interest rates and late payment fees
Repair Your Credit Score with These Steps
Your bankruptcy discharges gave you a clean slate from your outstanding debts. Now, you must rebuild your credit and improve your credit score to restore financial independence.
You can improve your FICO score in as few as two years. According to FindLaw, you can raise a poor credit score, below 579 points, to between 580 and 669 in 12-18 months.
- Monitor your credit report. Everyone is entitled to a free credit report every 12 months from the three major consumer credit reporting agencies from annualcreditreport.com. Request your first free copy three months after bankruptcy, and scrutinize every line item to ensure the report is accurate and that your debts are zero. Dispute and correct any incorrect information. Request the next two reports in three-month intervals so you can watch the negative information disappear and your new lines of credit appear.
- Apply for a secured credit card. You may be afraid a credit card will open you up to overspending. That cannot happen with a secured card because you set the credit limit with a cash deposit. Transactions for the secured card are reported to the credit bureaus helping with your credit repair process.
- Get a credit-builder loan. With a credit-builder loan, you make fixed, monthly payments to the lender who saves the money until the end of the loan. You then have access to the total amount. Your payments are reported to the credit bureaus the same as traditional loans.
- Find a co-signer. Ask a trusted family member with good credit to support you by co-signing for a credit card or a secured loan. Your cosigner is responsible for the debt if you miss payments, so keep your relationship intact and help build credit by creating a repayment plan and sticking to it. Your payment history is a big part of your credit score, and on-time payments go a long way to improving your FICO score.
- Become an authorized user. Have a parent add you as an authorized user on their credit card account. This option boosts your score less than other options, but it allows you to benefit from someone with good credit on an account in good standing.
Talk to a TDECU Representative
Let a TDECU representative help you find the right financial program to rebuild your credit. Whether you are looking for a loan or credit card, we have programs to meet you wherever you are in your financial journey. Contact a TDECU representative today.
Find more information about improving your credit score and other tips for improving your financial health in our Advice Center.