Last week I explored determining whether to declare bankruptcy. But what happens after you successfully go through the bankruptcy process and receive that debt discharge? Is your financial life ruined for the foreseeable future?
No. There is life after bankruptcy.
You do not need strategies to pay off your debt at this point because your debts have been discharged (i.e., eliminated) through bankruptcy. The task at hand is to rebuild your credit score and make sure you are on solid financial footing in your post-bankruptcy future. Think of yourself as someone who needs to establish credit, throw in a few wrinkles specific to bankruptcy survivors, and you are well on your way.
The goal of filing a bankruptcy case is discharge. If your bankruptcy case is dismissed, rather than discharged, you are in the same position as if you had never declared bankruptcy at all. Dismissal can happen for a variety of reasons, but those reasons generally stem from the same root cause—failing to meet the requirements imposed.
First and foremost, as I mentioned last week when discussing whether to file for bankruptcy, make sure your budget is realistic and avoids additional debt. Otherwise, you will be right back to square one.
Once your budget is set, you can start to think about rebuilding your credit. Unfortunately, you cannot build credit while avoiding debt completely, so you must be strategic. The easiest way to begin rebuilding your history is becoming an authorized user on someone else’s credit card, but do not count on this option being available to you. If someone is gracious enough to allow this, be sure to hand them the physical card as soon as it arrives to show you will absolutely not be using their account in any way, shape, or form. Only become an authorized user for the purpose of improving your credit score.
Get a checking account.
Begin with a checking account. If you do not already have one, open one now. You may face some extra hurdles opening a new account post-bankruptcy, but you need a checking account to keep your finances organized. (It is perfectly okay to use an online-only bank for your checking needs.)
Check your credit history.
Once you have a checking account, examine your credit history. You would have already done this at the beginning of your bankruptcy process, but now it is time to do it again. Order a credit report from each of the major credit reporting bureaus since the information reflected on each of them may be different. Make sure that they are all accurate. If there are debts still showing as owing and not discharged, or there are other inaccuracies, get them corrected.
You should get in the habit of regularly examining your own credit history regardless of your financial situation.
Checking your own credit history does not impact your credit score.
You can acquire your credit reports from annualcreditreport.com at no cost. Other sites that look similar may offer you “free” reports but will typically require you to sign up for paid services that you do not need.
Because the credit reporting bureaus do not calculate your credit score, your credit history will not include your credit score itself. Many websites will try to sell you credit monitoring services in exchange for also providing you with your score. Do not sign up for them. You can monitor your own credit by regularly checking your credit history reports, and many credit cards nowadays will allow you to view your credit score as an included service.
Apply for revolving credit.
Your next step should be to acquire a credit card. There are credit cards available to folks who have just come out of bankruptcy. You may even experience an uptick in junk-mail solicitations for new credit cards. They will typically have some sort of an annual fee, exorbitant interest rates, and a low credit limit. But that is okay:
Annual fees typically apply to cards providing some sort of rewards or benefit program, and our advice is to never open a credit card with an annual fee unless it actually makes financial sense (for example, the rewards that you actually will use are worth more than the fee). In the post-bankruptcy scenario, the “reward” is being able to open the credit card in the first place. Even then, the annual fee should be reasonable (for example, under $100), so be careful.
As far as the interest rate goes, you do not need to pay very much attention because you will not be carrying a balance on this credit card, so you will not be paying the interest.
Finally, the low credit limit should not be troublesome for the same reason that the high interest rate is not a cause for concern.
If you are having difficulty opening a credit card account, contact your bank or credit union. They may be willing to open a credit card with a low limit if you also open a savings account or certificate of deposit. This is known as a secured credit card. From the bank’s perspective, you are now a low-risk borrower because you have guaranteed that you will pay the debt by setting aside an equal or greater amount of money than your credit limit. (Your credit card is secured by the savings account or CD in the same way that your car loan is secured by your vehicle.)
Once you have a credit card, make only one or two charges per billing cycle for which you already have the funds to pay, and then pay the entire balance in full as soon as the statement arrives. This improves your payment history, the largest component of your credit score. To make the most of this situation, automate the payment process. Charge a fixed amount to your credit card automatically each month (for example, by setting your Internet bill to be charged to your credit card on a specific date), and then set your credit card to automatically pay your full statement balance from your checking account. Paying off the balance will require the same exact amount of money each month to facilitate easy planning on your part. Your credit card balance will be automatically paid without you thinking about it.
Apply for installment debt.
Besides acquiring revolving debt (like a credit card), you can also boost your credit score by acquiring installment debt. An installment debt is a fixed-amount, fixed-term debt, like a car loan or a student loan. Lower interest rates will be available if you have a co-signer or a guarantor.
A co-signer is someone who is technically jointly borrowing the money with you. Both of you are legally responsible for the debt. A guarantor only becomes legally responsible for the debt if the original borrower fails to pay.
As with secured credit cards, your best path to acquiring installment debt may be to secure the debt with the item you are purchasing. Save up the money for a particular purchase that you need to make anyway (for example, a piece of furniture) in a high-yield savings account, acquire it on credit—preferably at a 0% interest rate if paid off in a certain amount of time—and then set it to be paid automatically from that savings account.
Another option regarding installment debt is to reaffirm (keep) certain existing debt that you had pre-bankruptcy, but that must be done as part of your bankruptcy case. If available, this is a good way to keep a favorable interest rate that may not be available afterwards.
While getting an installment debt can improve your credit mix, and ultimately your credit score, do not go into debt just to improve your credit score. Credit mix is a smaller factor in your credit score, so it is fine to focus on payment history and credit utilization by paying off a small charge on your credit card each month.
Live your debt-free life.
Your credit score will gradually rise as you rebuild your credit history by paying your bills on time post-bankruptcy. It will not happen overnight, though, so be patient and trust the process. Reach out if you need help setting up your financial game plan, and work towards creating a positive financial future.
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