How to Rebuild Your Finances After Bankruptcy
Although declaring bankruptcy can provide relief from the worries of unmanageable debt, many consumers are left wondering when and if they will be able to secure new credit at reasonable rates. Your credit report will reflect the consequences of bankruptcy for 7-10 years. But that doesn’t mean it will take that long to rebuild your credit. Fortunately, the negative effects on your credit will begin to fade as you replace them with newer, more positive entries on your credit report. Let’s look at how to rebuild your finances after bankruptcy.
Stay on Top of Your Credit
Following bankruptcy, you’ll want to regularly review your credit reports and scores to ensure they contain accurate information. Be on the lookout for any errors, or for accounts that you don’t think belong to you. You can monitor your credit reports weekly at each of the three credit bureaus for free through April 20, 2022, so there’s no reason not to do it. And try not to feel discouraged. While your credit will initially appear lackluster following a bankruptcy, there’s nowhere to go but up.
Stick to a Budget
This is the time to get back to the basics of good money management. That includes planning and following a budget. Knowing how much money you have coming in, how much is going out and exactly where it’s going helps you make better choices and save for the future. Adopting a cash-only lifestyle and breaking free of a reliance on credit will help you create healthier financial habits and minimize the temptation to overspend.
Establish or Replenish an Emergency Fund
One of the biggest takeaways from the financial fallout of the pandemic is the need for emergency savings. Everyone, regardless of age or income level, benefits from having at least 3-6 months of living expenses set aside for emergencies. Having emergency savings provides priceless peace of mind. It also helps keep people from running up credit card debt to pay for living expenses in case of illness or job loss.
Make Payments Count
Be sure to sign up for a service like Experian Boost, which gives you credit for on-time payments for things like paying your cellphone bill, utilities and streaming services. It probably won’t have a dramatic impact on your credit score right away, but the positive effects of on-time payments will add up. And any positive payment history following a bankruptcy is a big step in the right direction.
Begin Using Credit Carefully
At some point after a bankruptcy, you will need to start using credit again, but you must do so carefully. There are several ways you can start to establish responsible credit habits, including:
- Secured Credit Card: These cards are backed by a deposit in a savings account. The amount of the deposit determines your credit limit. This is a lower-risk way to dip your toe back into the waters of using a credit card.
- Credit Builder Loan: Usually offered by credit unions, these are personal loans designed to help people begin to rebuild credit following a financial hardship, such as bankruptcy.
- Becoming an Authorized User: Talk with a trusted friend or family member about becoming an authorized user on one of their credit cards. Be sure the account you’re on reports activity to the three major credit bureaus so you get credit for the account’s positive payment history.