When people file for bankruptcy one of the most common concerns is how long it takes to recover from a bankruptcy filing. Although many of the downsides to bankruptcy are overblown, it’s not without consequences. The biggest concern clients voice is, “When will this be off my record?” What they typically want to know though, is a slightly different question – when will the bankruptcy stop negatively impacting credit?
A bankruptcy remains on a credit report for 10 years, but it is not a dramatic negative mark for that period. Most clients’ credit scores rise to the high 600 to low 700 range within 2-3 years. Beyond that, they continue to go higher. I’ve had clients who have recovered even faster, with scores above 700 one year after filing bankruptcy. Each person is different but there are things you can do help your credit score recover more quickly. Here are some ideas:
1. Wait a month or two after your bankruptcy case has closed and then obtain a credit report. Credit monitoring services can be particularly useful and these days there are some great free providers like CreditKarma and CreditSesame. All debts that existed prior to filing bankruptcy (assuming they weren’t reaffirmed), should show up as “included in bankruptcy” or something similar. They should not continue to show delinquent each month. Credit reporting, however, is fraught with errors and bankruptcy is no different. If you notice some of your creditors are not properly updated after filing bankruptcy, the easiest way to resolve it is to dispute the item with the credit bureaus. Include proof of you bankruptcy filing, the date you filed and your case number. The credit bureaus will then update the information to show that the debt was included in a bankruptcy. Ensuring you don’t have ongoing derogatory items due to credit errors is an important part of rebuilding your credit after a bankruptcy.
2. Learn to live off of cash. This doesn’t mean don’t ever use credit again. It means that you should budget so that you don’t ever have to live using credit again. If you learn to budget and live off of income, not credit then you have complete control over when and where you use your credit. Doing that will ensure you only use credit in the future in ways that benefit you.
3. It may sound crazy but go get a credit card. Many clients get offers for new credit cards mailed to them immediately after filing bankruptcy. Most of these will have very high interest rates, but for the recently bankrupt these cards can help. Take out one or two cards and just run a few charges each month. Pay the balance off every month so you don’t incur any interest charges. This will provide positive credit reporting each month and help push your score up faster.
4. If you can’t get any traditional credit cards, go for a secured credit card. A secured credit card is one where you provide the bank with a deposit equal to the credit limit on the card. The banks report secured credit cards the same as traditional credit cards and the positive reporting is just as beneficial. Not all banks provide secured cards, but Bank of America, Wells Fargo, CapitalOne, and US Bank all offer them.
5. Make sure and pay all your bills on time. It’s imperative that all your utilities, medical bills and new credit bills are paid on time every month after bankruptcy. Nothing will derail a fledgling credit score faster than newly reported defaults after a bankruptcy filing.
6. Don’t apply for multiple new credit accounts in the first two years after bankruptcy. Each time you apply for new credit, it appears on your report as an inquiry. Each inquiry hurts your credit score very slightly, so having frequent credit inquiries can add up to bring down your score.
7. Try to keep the same address. A portion of your credit score is based on your stability. One of the factors used to determine this is your FICO score. The statisticians at FICO know that a borrower who has lived in their home for 20 years is less likely to default than a renter who moves every year or two. Although it’s a small portion of what goes into your score, every little bit helps.
If you follow these simple steps, you should see your credit score rise faster than you might expect after bankruptcy. For most clients it’s a 2-3 year recovery where the score gets a little better each month. Following these steps may make your score recover even faster.