A New Beginning after Bankruptcy: Part I

Filing bankruptcy is a financial last resort – an option that should be decided upon only when there are no other options left for debt relief. Not surprisingly then, the impact that filing has on one’s credit report and score can be dramatic, and filers must work slowly but surely to regain their financial footholds.

Despite some of the negative consequences of bankruptcy, however, life after bankruptcy can be viewed as a brand new financial beginning. The first thing to do to re-start your finances is to realize exactly how your credit has been affected by your decision to file.

Bankruptcy Aftermath

Filing bankruptcy is, essentially, a legal declaration that you are unable to pay your debts. Debts may be discharged via chapter 7 filing, or may be reorganized into a realistic payment plan along with some discharges via chapter 13 filing. In any case, taking such action makes you a very “risky” consumer to whom creditors may lend, and this risk will be reflected on your credit reports.

Not surprisingly then, it is much more difficult for individuals who have filed bankruptcy to obtain credit than those who have not. On the other hand, however, filers with many unpaid debts probably found it difficult to obtain credit before filing too, and some creditors may view filing as more responsible than leaving debts unpaid.

In any case, it is very possible to recover financially from bankruptcy, and it may not be as difficult as you think.

Rebuilding your Credit

For those who have filed recently, perhaps the last thing you to want to do - or think that you should do - is delve back into credit. While it might seem like it is best to deal only with cash, this usually is not the best choice for anyone except those with serious spending problems. The truth is, you cannot improve your credit report and score without working responsibly with credit again.

There are opportunities to obtain credit almost as soon as the ink dries on your bankruptcy documents. Just look at people who file bankruptcy more than once – they sure must have been able to obtain a lot of credit! Not that this is your goal of course… but you get the point. Choose your credit wisely.

You will need to obtain both revolving and installment credit to fix your credit in the best possible way. Revolving accounts are those that provide a specific credit limit of which you may borrow as much as you need. As you repay your debt, the total limit once again becomes available. Installment accounts, on the other hand, provide you with a one-time specific amount that you must repay in monthly payments.

A credit card is a type of revolving account that can help you to rebuild your credit. Chances are, however, that you will have to opt for a secured card rather than one that is more traditional.

Secured credit cards require that you make a down payment to your lender before credit is extended to you, as security for the “risk” that you pose to the lender. Such cards may grant you only about $200-500 credit, a limit probably much lower than you were able to obtain in the past.

Despite the low limit, however, you should use only a small amount of your available credit – about 30% or less. Using any more than this will not help to rebuild your credit positively. Remember that your ultimate goal is to improve your credit, and the best way to do this is by regular use, and by paying off your total balance each and every month.

When looking for a secured card, try to find one that does not require an application fee, and has a small or non-existent annual fee. Also make sure that you will be eligible for an unsecured card in the near future after you have proven your responsibility in paying.

Go to Part II of this article.