Few people who have filed for bankruptcy protection ever thought they would need to take what seems to be such a drastic step. But every year, hundreds of thousands of Americans do just that.1 So, you are not alone. And you can recover. Recovery starts by thinking of bankruptcy not as the end of a certain chapter in your life, but as a new beginning — a clean slate.
Rebuilding credit after bankruptcy is not a quick process, by any means, but keep this in mind: Median credit scores increase steadily year over year after consumers file for bankruptcy.2 Diligence, patience and a determined, positive attitude are how to build credit scores after bankruptcy. All you need is a plan.
Where to Start After Bankruptcy – 6 Steps to Take Now
1. Make a budget. It sounds simple, and it is. Rebuilding your credit score comes down to knowing how much money you have coming in, and how much you need to pay your bills. Be thorough, accounting for every dollar you pay for services, food, utilities and other goods. Creating a budget is an eye-opening exercise that will shed light on areas where you can adjust your spending habits. The closer your income is to your expenses, the more carefully you have to manage your finances. Easy-to-use online budgeting tools can help you create and manage a budget as well as books you can check out at your local library, where you'll find many popular books on the topic of budgeting. There’s even an easy-to-use budget calculator right here on our site. With a basic understanding of Microsoft Excel, you can create your budget in a dynamic worksheet that will make it easier to lower your expenses to produce a balanced budget that helps you live within your means.
2. Pay all of your bills on time. Timely bill payment is one of the best ways to improve your credit score, especially after having filed for bankruptcy protection. There are some simple steps you can take that will make timely bill payments easier, like automating as many bill payments as you can, paying with convenient mobile apps, and sticking to your budget. Making consistent, on-time payments slowly but surely builds your credit score. Conversely, even one late payment can undo months and months of your credit-building efforts. If you’ve created a household budget as discussed above, you’ll know which payments you need to make when. Schedule your payments into a calendar that will remind you to pay them, take advantage of reminders most lenders offer, or, better yet, set up automated payments from your bank account so you won’t forget. If you're still paying down balances on accounts that weren't forgiven as part of the bankruptcy, focus on debts with the highest interest rates first, since they will cost you the most. If you can, pay more than the minimum payment so you can eliminate that debt faster. Even a few dollars per payment can add up to a big reduction of your debt over time.
3. Check your credit report regularly. Experian, TransUnion and Equifax are the three main credit reporting bureaus. You can also use a free service such as AnnualCreditReport.com. All are required by law to furnish you with a current credit report once a year. By alternating among all four of these sources, you can get a free report every three months — it’s a savvy way to stay current on what creditors see when they evaluate you as a borrower, tenant or job applicant. Bookmark these sites in your web browser and create a calendar reminder to check your credit score again every 90 days. Monitoring your credit score is a great way to see if your other credit-building efforts are paying off, and to spot any issues that might be keeping your score down. Catching errors or negative reports early gives you an important jump on disputing any misinformation and having it corrected.
4. Dispute any errors on your credit report. Erroneous reports get reported to credit bureaus more frequently than you might think.3 That’s why monitoring them regularly is so important. When you find information in your report that isn’t accurate, is the result of fraud or identity theft, or that was resolved earlier but is still being negatively reported, formally dispute the outdated or inaccurate filing in writing. Your account of the event, or your proof that it was successfully rectified, will be added to your credit report so future creditors can see that resolution along with the disputed event.
NOTE: Credit reporting agencies and the information provider are liable for correcting any incomplete or inaccurate information in your report. Their responsibility to fix errors falls under the Fair Credit Reporting Act. Disputing errors doesn’t take much time and doesn’t require a lawyer, but it does go a long way to neutralizing information that can adversely affect your credit score and your ability to borrow money, get a job or secure housing in the future. You should know what lenders look for when deciding if you're creditworthy.
5. Build an emergency fund. Many bankruptcy scenarios started with a large, unplanned expense that couldn’t be paid. Out-of-pocket medical bills or major home and auto repairs often are the financial tipping point from which many people can’t recover. Being laid off or having your hours cut at your job have the same effect — you suddenly owe more than you make. Having even modest reserves in an emergency fund can help, if only to buy you some time to find a second or better-paying job, or to arrange financing to pay unexpected bills.
Saving a little bit from each paycheck can build your financial confidence, too. As you watch your savings grow, you’ll know you’re looking ahead and staying in better control of what may come your way in the future. As you pay off more of your bills, increase the amount you save. If no unforeseen expenses come your way, shift your savings into a retirement account for an even longer view of financial stability.
6. Apply for new credit. Key to rebuilding credit after bankruptcy is proving that you’re a responsible borrower. While you might be tempted to think that credit is the last tactic you should use, it’s actually a valuable tool for building credit. Secured credit cards, builder loans and retail and gas credit cards often have higher interest rates, but are sometimes easier to get than traditional credit cards. And remember, by paying off your balance every month, you won’t be incurring any interest charges. With each on-time payment, your credit score improves.
How Long Does It Take to Rebuild Credit After Coming Out of Bankruptcy?
Everyone’s circumstances are different, so there is no one answer to this common question. You should know that bankruptcies stay on your credit report for seven to 10 years.4
In that time, though, and using the six steps explained here, combined with a disciplined, sensible approach to your finances, you can restore your credit score to your pre-bankruptcy level — and potentially even higher! Think of your bankruptcy as an opportunity to find a better balance between what you earn, save and spend. Use it as an occasion to start saving for the next unplanned expense, and make sure that this bankruptcy is your last.
This article has been updated from its original publishing on August 27, 2018. Matt Diehl contributed to this article.