Credit After Bankruptcy Discharge

3 Tips to Rebuild Credit After Bankruptcy

As a bankruptcy attorney who’s done thousands of chapter 7 cases, one of the common Bankruptcy FAQ I get is, “will I be able to rebuild credit after bankruptcy?” And the short and maybe surprising answer is, Yes!

Default Option: Doing Nothing

But first, let’s start with the default option. If you’re not paying your credit cards or are late or maxed out or over the limit, you have a lot of derogatories counting against you. Your credit FICO score is probably pretty bad before a bankruptcy.  This is because, under 15 USC 1681c(a), collections, late payments, charge-offs, etc are all reported against you for seven years.

Before you file bankruptcy, your credit was already bad. It wasn’t going to get better. It was a garden of weeds. Just a bunch of old derogatory accounts that were hurting your credit score, for 7 long years. Any new account you get will be choked by all those weeds. You won’t get credit for rebuilding. Trying to reestablish your credit will be futile. All those derogatory marks on your credit report will smother any good you try to do.

Next Option: File Bankruptcy

Now, if you file bankruptcy chapter 7, it doesn’t seem like it should help. Why?  It’s no secret that if you filed bankruptcy, your credit score will be worse.  Because in the public records section of your credit report, there’s now Bankruptcy Chapter 7. And, under subsection 1 of the same law, that bankruptcy is reported against you on your credit report for ten years (only 7 years after filing for Chapter 13).

So let me say this super loud and clear: if you file bankruptcy, it will hurt your credit score, especially in the beginning. And if you file bankruptcy and just let it sit there, your FICO score will probably initially go even lower than the lousy terrible score you had before you file bankruptcy. If you need to find a new apartment to rent, the time to do it is not after you file bankruptcy, with a fresh new bad mark on your credit report.

But something happens to credit after bankruptcy discharge. All those weeds got bulldozed. The garden is now starting to get in shape. This is not to say that credit after bankruptcy erases all those lates and bad marks you had beforehand.

Remember, the FCRA link above says that all those derogatory accounts had to be reported for seven years. They’re still there. But they don’t count against you as much.  Things are starting to get put into order. And to stick with the analogy, the garden is rototilled.

Credit After Bankruptcy Discharge

Now you finished your case, it’s time to rebuild your credit after bankruptcy discharge. Remember, we started with a lot full of weeds, thistle, and even some tumbleweed blowing through. Then we bulldozed all the weeds, rototilled the soil, and have prepared it for starting over. Now that we have the bankruptcy discharge, it’s time to rebuild recredit.

Reminder: the bankruptcy is still going to be reported on your credit report for years. Nothing that follows erases the bankruptcy.

Step 1: Apply for Credit Card After Bankruptcy

This may seem like a no-brainer moment, because to get credit after bankruptcy discharge you have to apply for some. But how you do it is key. What you don’t do is just apply for anyone and everyone that takes you, desperate to chase after anyone who throws you a bone. After bankruptcy, you have something they want. Two things, actually.

They know you can’t file bankruptcy again soon

You can only file bankruptcy Chapter 7 and get a discharge every 8 years. So after a discharge, all the credit cards would love to have you as a customer. If you fall behind, you can’t run anywhere for safety. Well, not anytime soon. This makes your business desirable, and less of a risk.

They know they can gouge you on fees

But while you’re less of a real world risk, they’ll tell you that they’re being so nice take a chance on you. Because they have a reasonable justification for charging you an arm and a leg on interest. And monthly fees. Not to mention annual fees. Also, anything else they can think of to profit off you. See how desirable you now are!

So where were we? Oh yes, apply for credit cards after the discharge. The way to rebuild credit is not to go get 17 new credit cards after bankruptcy. No, go and of the crummy offers you’re going to get, pick the least awful one. Maybe two. Tops. But no more than two credit cards after bankruptcy. You may even need to give them some money to hold as a secured credit card. Only plant one seed in your new bulldozed garden (or two).

But here’s the key: make sure they’re going to report all your payments on your credit report (you are going to be on time with your payments, right?). Not all credit cards report. If you’re going to be choosy and pick one lucky card, make it one that: a) reports; b) has the lowest fee structure; c) suck it up and let them have some collateral as a secured credit card if you must.

Step 2: Use and pay your credit cards with strategy

This is really a two-parter. You can’t just go get a credit card and run it up. That will show the credit card companies that you haven’t learned anything and have the same bad habits or financial trouble you had before the bankruptcy. What you do from this moment on will have a bigger impact on your future than the bankruptcy itself. Water and cultivate those seeds to make them grow.

First, use the cards with strategy. This means, not a lot, but casually. Almost like a supplement to your debit card because you should be living off your cash and your own money. Let’s say you have a credit card limit on your new secured card of $250.  In a given month, maybe put a tank of gas on the credit card, maybe some groceries. Don’t go above half your balance. Show you’re in control of it, not the other way around.

Second, pay the cards with strategy. What I mean by this is don’t do what most people do. Most people with credit after bankruptcy will pay only their minimums. Paying only the minimum payment each month is a danger sign, and the credit card companies love it. This shows them that you’re in trouble and can’t afford them. They got you. You’re going to pay interest forever, until you get your next card, then the next. For the love of all things holy, don’t pay only the minimum payment. If you do, you charged too much and need to get that balance down.

Paying the Full Balance Each Month May Not Help

Another thing people do is pay their entire balance each month. Now, this may seem like a smart money management tip, and indeed, it is. But what it doesn’t do is help the credit cards profit off you a little bit by getting the sweet sound of interest in their pocket. If you treat the credit card like a debit card, they’re not making money.

So pay half the balance, maybe 2/3 of it… in case you may add to it the next month. Show them you’re in control of your account. Ideally, of that $250 available limit, you’d charge $100, pay $50, add $75, pay $90. Keep your balance under half the limit. Maybe every few months pay the whole thing off and start over. But the key is, as with all credit after bankruptcy: you’re using it, with a strategy. You’re watering the garden, making those flowers start to grow.

Step 3: Upgrade your cards, upgrade your credit

To reestablish your credit, you need to go a step further. In time, you’ll start getting new suitors who want to have a financial relationship with you. As you start showing that the new you is a responsible you, some credit card companies who were more skittish early on may feel like sending you a card. If you started out with a 29% APR card, and you’ve been using it wisely, maybe a 21% credit card — without needing security — will come knocking.  Take it.

Do not accumulate a credit card collection to feel good or secure. Here’s the key: call up your old 29% credit card and cancel it, close it. It was fun, thanks for taking chance on me, we both won, let’s move on. Then cut it up. And when a 17% APR card comes around, do the same thing with your 21% one.  Then the same to your 17% card when a 9% one comes around. Then 6.5%, and then 3%.

The key is to never have more than two open accounts at a time.  Remember: you don’t need credit cards and debt.  You’re just doing all this to show you that you’re responsible and can be trusted.  You want to be able to live off your paycheck and then save. That’s your rainy day fund, not the credit cards. Keep only one, two max.  This is how you prune back your new garden, trim it, keep it thriving, give it room to grow.

Student Loans After Bankruptcy

People ask “can I get student loans after bankruptcy?” And the answer is, like most things, “it depends.” 11 USC 525(c) says that a government unit that operates a student loan or grant program cannot deny a student loan to someone who filed bankruptcy. This extends to a person engaged in business for making or guaranteeing student loans.  Not every student loan falls under this, but many certainly do.  Part of the rationale for being to get student loans after bankruptcy is because they know you can’t do another Chapter 7 right away. Further, per 523(a)(8), student loans generally aren’t discharged in a bankruptcy anyway. 2021 update: There’s a Senate bill which would change the Bankruptcy Code to allow some student loans in bankruptcy to be discharged.

Credit After Bankruptcy: The Kicker

The point of all this not to have credit for credit’s sake. A FICO score is just a number. You are not a number. No, you are an important person with gifts, skills, and attributes that make you unique. We can agree that you certainly don’t need a number to validate you.

The point of all this is to increase your buying power, to improve your living situation, to increase your freedom. To buy a car on credit without paying 21% APR. More importantly, to buy a home of your very own instead of paying rent. And the rule of thumb I hear is that two years after bankruptcy, if you do the above, you may be able to qualify for a mortgage (assuming you have good income, a nice down payment, and all the other things a mortgage company looks at).

In fact, a study by LendingTree shows that credit after bankruptcy discharge usually improves.  This opens the door to getting better interest rates, for what? So that you can afford a nicer home with an even lower interest rate. And this then helps you go from chapter 7 or chapter 13 to the next and most important chapter of your life: the freedom of home ownership and financial security.