After you get your bankruptcy discharge—the order stating that you no longer owe your debts—there are some simple things you can do to improve your credit score.
For most people, the purpose of filing bankruptcy is to improve their credit score
Some folks need to file bankruptcy for reasons unrelated to their credit score, such as to cure a mortgage arrearage just to name one other reason. However, for most debtors, the purposes of the bankruptcy filing is to discharge debt they are unable to pay and, by doing that, improve their credit score.
But how exactly does my credit score improve?
The first step happens with the discharge itself. Once your unpaid debts are discharged (wiped out, terminated, forgiven) then those bad debts are no longer weighing down your credit score.
But there’s also the second half of the process: What to do after bankruptcy.
The key is carefully using credit after bankruptcy
Now that those bad debts are wiped out, it’s important to establish new lines of credit—carefully—to build up your credit scores. One of the best tools for this is to open a secured credit card. With a secured card, you deposit money (for example $250 or $500) that the credit card issuer can use as security for payment of the credit card. Put simply, if you don’t pay, they can use the money you deposited to repay the loan.
Some things to keep in mind
- Keep your utilization ratio low. That’s the percentage of the credit line you’ve utilized or borrowed. For example, if you have a $500 line, you would not want that ratio being over 50% ($250) at any given time, and probably keeping it around 30% would be best. So don’t charge more than $250.
- Revolve the debt a bit. Don’t charge $200 and then pay it off immediately. Instead, charge $200 for something you must pay anyway (maybe a cable bill or other utility), then pay the $200 off by paying $50 until it’s paid. Then repeat the process.
- Pay all debts on time. This is obvious, but it bears repeating. In our example above, whatever you do, do not make those $50 payments late! Make reestablishing your credit your new hobby. Log on or call to make sure the payment arrived. Double check. Don’t assume, and don’t guess.
It might also make sense to sell the car you had when you filed bankruptcy and purchase another used car. Your interest rate may even be lower right after you receive your bankruptcy discharge. Also, if you didn’t reaffirm on the auto debt (most debtors don’t–see “Keeping Your Car Out of Bankruptcy” and my four-part series on reaffirmation agreements for more details), you won’t get credit (pardon the pun) for your on-time payments made after your bankruptcy. Credit bureaus only report debt on which you have personal liability, so unless you reaffirm (most debtors don’t bother) only a new loan taken out after bankruptcy will help you reestablish your credit score.
Some caution is in order here
I’m not saying everyone who files bankruptcy should immediately go out and finance a car after bankruptcy. What I am saying is that if you need a newer vehicle, it might make sense for you. And if it does, one positive result will be that your on-time payments will be reported on your credit, which, in turn, will help improve your credit score.
This really works…
I recently met with a cilent who had scores in the 720s less than two years after bankruptcy. So this works. You just need to have a system and understand how debt affects credit scores.
One last thing: Don’t forget to check all three of your credit reports a few months after your bankruptcy case closes. Dispute any inaccurate reporting immediately by asserting your rights under the Fair Credit Reporting Act.