How to Rebuild Credit After Bankruptcy
“How to rebuild my credit” and “How to rebuild your credit score” are two of the most commonly asked questions by individuals interested in filing bankruptcy or who may have just completed the bankruptcy process.
It is common for people to be concerned about their future credit rating and how to rebuild credit after bankruptcy. Our Dallas-Fort Worth bankruptcy attorneys witness the anxiety and unease many people have about rebuilding credit during their free bankruptcy consultations with our law firm.
Our goal is to provide experienced legal counsel, support, and guidance so that your bankruptcy experience is as stress-free as possible.
Is it True — Does Filing Bankruptcy Prevent Future Credit Rebuilding?
One of the bankruptcy concerns expressed by many individuals is how will filing a Chapter 7 or Chapter 13 bankruptcy case impact their overall credit rating. In addition, people who meet with our bankruptcy lawyers express concern about rebuilding credit scores after bankruptcy.
Unfortunately, a common bankruptcy myth causes many people undue anxiety and fear about filing bankruptcy. Sadly, this bankruptcy misconception about credit causes people to avoid filing for bankruptcy even though a Chapter 7 or Chapter 13 is the best option for getting rid of debt.
The truth is that a bankruptcy filing can result in a temporary reduction in your credit score. While a bankruptcy filing may remain on your credit report for up to 10 years, you can begin to rebuild your credit as soon as your bankruptcy case is filed. In fact, for debtors who are retaining their home, they can begin rebuilding credit scores by making sure they pay all secured debt payments, such as mortgages on time each month. Past due payments are one of the most common and most harmful credit mistakes people make each month.
How is My Credit Score Calculated?
Your credit score is based on a calculation comprised of five components of your credit report. To rebuild credit after bankruptcy, you need to understand how credit scores are calculated. By understanding how your daily financial decisions impact your credit rating, you can focus your effects more successfully.
FICO Scores are based on the following five components of your credit report:
- Payment History — Your payment history makes up 35% of your credit score.
- Amount Owed on Debts — The amount of credit you owe makes up 30% of your credit score. However, it is not just the total debt owed, the calculation also analyzes the amount you owe on different types of debt, how many accounts have open balances, the percentage of the credit limit used for each account, and other factors.
- Length of Credit History — 15% of your credit score is based on the length of your credit history. A long credit history is generally a positive factor.
- A Mix of Credit — The mix of accounts on your credit report represents 10% of your credit rating. In most cases, a mix of credit accounts is a positive factor to increase your credit score.
- Recently Opened Accounts — Your score is also impacted a small amount (10%) by the number of new credit accounts opened within a brief period.
Understanding how a credit reporting agency computes your credit score helps you discover ways to rebuild credit after bankruptcy.
Our Texas bankruptcy lawyers caution against running head first into the credit waters again without a strategic plan to prevent missteps that could hurt your finances instead of rebuilding your credit rating. Below are some tips from our bankruptcy attorneys about how to rebuild your credit after filing bankruptcy.
How to Rebuild Credit After Filing Chapter 7 or Chapter 13?
As discussed above, the best way to rebuild credit scores during bankruptcy is to make all ongoing credit payments on time. If you are keeping your home and vehicle in a Chapter 7 case, you should make each monthly payment before the due date for that payment. If you have income tax debt and student loans that were not discharged in bankruptcy, you need to make those payments on time too. If you filed a Chapter 13 case, most of your debt is included in your bankruptcy plan except for a mortgage. Continue making your mortgage payments each month on time.
Other than paying ongoing debts during your bankruptcy case, you must wait until after your bankruptcy case is closed to obtain new credit. You cannot incur debt during a bankruptcy case without court approval.
Therefore, the following tips apply after your bankruptcy case is discharged and closed.
- Obtain a Copy of Your Credit Report — You cannot know how to reestablish credit if you do not know the current state of your credit history. You are entitled to free copies of your credit report every 12 months from all three credit reporting agencies. Carefully review the reports for mistakes. Report any mistakes to the creditor and the credit reporting agency immediately and follow up to make sure the information is corrected. The FTC provides information about disputing errors on credit reports on its website.
- Begin Slowly — If you have a credit account that was not closed because of bankruptcy, you may want to use that account to charge a small amount and pay it off each month. Closing an old account could further hurt your credit score because it impacts your length of credit.
- Secured Credit Cards — Some people use secured credit cards to reestablish credit. Verify that the company reports the information to credit reporting agencies, do not go over the credit limit, and make all payments before the due date. The FTC provides information about secured credit cards on its website.
- Go Slowly — When you are ready, you can begin to open other credit accounts. However, you must be careful. Do not obtain loans or use credit unless you are sure you can make the payments. Keep balances below 30 percent of the credit limit on the account and make each payment before the due date.
The information you learned in your Bankruptcy Credit Counseling Course and the Bankruptcy Debtor Education Course can help you as you begin rebuilding your credit after bankruptcy. However, be very cautious and suspicious of companies that claim they can increase or repair your credit score quickly. Repairing your credit is something that takes time, and you can do for yourself free of charge.
For helpful information about credit and rebuilding credit, refer to the FTC’s website. You can find information that will help you as you continue to recover and rebuild after a financial crisis.
Do You Have Questions About How to Rebuild Credit After Bankruptcy?
Leinart Law Firm helps clients take the first step on the path of rebuilding their credit after a monetary crisis. Contact our law firm by calling (469) 232-3328 or (817) 426-3328 to request a free bankruptcy consultation with a Texas bankruptcy lawyer.