Bankruptcy filing statistics by Epiq reveal that during the first five months of 2021, the total new bankruptcy filings across all chapters were 182,629, according to a report on GlobeNewswire. Too often, bankruptcy is linked with reckless spending, but that’s not always the case. Sometimes, people file for bankruptcy due to financial hardships caused by medical expenses or loss of income. Whatever reasons you may have, filing for bankruptcy can be distressing. It also hurts your credit score, reducing your chances of qualifying for loans.
Typically, the impact of bankruptcy on your credit lasts for seven to ten years. Nonetheless, declaring you’re bankrupt can be an excellent option to rebuild your finances. To enjoy the best outcomes, take time to understand what is a discharge in bankruptcy and then implement a few essential tips listed below on how to rebuild after bankruptcy.
Monitor your income and expenses
The first step to managing your finances and staying on top of your debts is creating a budget. When you have a budget in place, you can monitor how much you spend versus your income. That way, you can determine where you’re overspending and how to reduce costs on expenses. However, budgeting can be daunting if you have never created one.
To ensure you budget wisely, list all your fixed expenses, such as rent, car payments, mortgage, and utility bills. Next, calculate how much you spend on variable expenses like grocery, entertainment, and clothing. Doing so helps you decide if your current income covers all your essential expenses. If not, cut extra costs or find other sources of income. Remember, after bankruptcy, lenders will approve your loan application if you have sufficient income to settle existing debts and have some money left in your savings account. With this in mind, make it a habit to save funds for emergencies and start investing for your retirement.
Review your credit history
Reviewing your credit report is essential because you get insights into why your score isn’t improving. So, make sure to get a free copy of your credit file from the Annual Report Credit website. And when evaluating your credit report, confirm that all the details are correct and create targeted strategies to improve your score. In most cases, you’ll spot errors like inaccurate personal details and incorrect account records, which often lower your credit score. Also, ensure your bankruptcy status is removed from your file within the shortest time possible.
Keep in mind your bankruptcy will stay on your credit for several years, depending on the chapter you’ll choose. For instance, if you opt for chapter 7 or 11, your bankruptcy stays on your credit file for ten years, and seven years if you file for chapter 13. As a rule of thumb, learn how different chapters affect your credit before filing for bankruptcy. For example, if you’re filing for personal bankruptcy, get to know the differences between chapter 11 bankruptcy vs chapter 13. Typically, chapter 11 is ideal for entrepreneurs looking to reorganize their debts to keep their business running and generate enough revenue to pay debts. However, an individual can declare bankruptcy under this chapter. On the other hand, chapter 13 is designed for personal bankruptcy only, as it allows individuals to discharge some debt and readjust the remaining ones.
Improve your credit habits
Over time your credit score will improve as the effects of bankruptcy start to fade. Nonetheless, practicing healthy financial habits is necessary if you want to recover from monetary hardships. To achieve the best outcomes, make it a habit to pay bills on time. Given payment history makes 35 percent of your credit score calculation, making consistent on-time payments is a sure way to rebuild your credit. Finance experts also recommend staying on top of other essential bills like utilities to enhance your credit.
Reducing your credit card use is another great way to improve your credit score after declaring bankruptcy. Regardless of how you ended up in bankruptcy, the last thing you want is to fall back into bad financial habits. Therefore, limit credit card use when shopping or settle for cash only for a couple of months. This trick helps you avoid overspending on non-essential items. Also, consider maintaining low credit card balances and opening an emergency savings account. These practices are crucial to keeping debts at a minimum, hence improving your credit score.
Consider applying for a secured credit card
As much as minimizing your credit card usage is essential when recovering financially after bankruptcy, you may want to use secured credit cards. A secured credit card enables you to restore your creditworthiness. To make the most of these cards, you must deposit cash into your account and borrow against it. For example, if you deposit $300, that’s your credit limit.
Although these credit cards demand a high-interest rate, they are excellent options to prove responsible credit habits. After making consistent payments using secured cards, you can qualify for unsecured, traditional credit cards. However, applying for secured credit cards after bankruptcy doesn’t guarantee acceptance by lending institutions. So, familiarize yourself with the requirements for getting a secured card in advance. That way, you can evaluate your finances to determine if a secured card fits your needs before agreeing to terms that might hurt your score.
Leverage credit-builder loans
If taking a traditional loan to build your credit after filing bankruptcy seems impossible, consider credit-builder loans. When you take a credit-builder loan, the lender doesn’t allow you to access the borrowed funds until you have paid the loan in full. Once you get the funds, the lender then reports your payment activities to credit bureaus. Ideally, credit-builder loans help you create a positive payment history, thereby rebuilding your credit without much hassle. Nonetheless, take time to understand how credit-builder loans work before applying for one.
Filing for bankruptcy isn’t an easy decision, and the legal process can be stressful and even hurt your credit. But there’s a bright side to declaring bankruptcy. It wipes out old debts, giving you a clean financial slate and time to rebuild your credit. To increase the chances of bouncing back after bankruptcy, track your income and expenses regularly, limit the use of credit cards, leverage credit-builder loans, and improve your financial habits.
