Bankruptcy is sometimes inevitable when a person has no other way to meet financial obligations. It provides debt relief, but looks bad on credit reports, because lenders see it as a warning that the person may not be fiscally responsible. There are certain steps that help repair the damage over time.
Definition
Consumers usually file Chapter 13 or Chapter 7 bankruptcy. Chapter 13 means the creation of a repayment plan that runs from three to five years, while Chapter 7 wipes out most outstanding debts completely. Both pull down credit scores and remain on a person's credit records for seven to ten years, according to Bankrate columnist Liz Pulliam Weston.
Considerations
Credit accounts are necessary in order to rebuild a post-bankruptcy credit score. It is not impossible to open new accounts immediately after bankruptcy, but it is challenging and more costly. People must often open secured credit card accounts in which they deposit money into a bank account to guarantee repayment. The credit line is equal to the deposit, and payments are reported to the credit bureaus just like an unsecured card. Some lenders specialize in providing unsecured cards to people with poor credit or recent bankruptcies, but they usually impose high fees and interest rates. It may be necessary to temporarily open this type of account to rebuild credit until a person qualifies for traditional accounts again.
Process
FICO recommends rebuilding a perfect payment history on all new accounts because payments make up 35 percent of a consumer's total score. The bankruptcy will affect this area, but it has less impact as time passes if the latest records are positive. People with recent bankruptcies should be careful not to build up too much new debt. Different types of accounts, like revolving credit and installment loans, look better than just one type, but they will hurt the score if the amounts are too high. Consumers should also monitor their TransUnion, Experian and Equifax credit reports to make sure positive information is being reported and that there are no negative mistakes. By federal law, everyone is entitled to free yearly reports from annualcreditreport.com.
Time Frame
It takes time to improve post-bankruptcy credit to a level that qualifies a person for easy credit and favorable terms. According to Pulliam Weston, it takes about a year or two of proper credit management to raise a score enough to get credit cards and loans with good interest rates or to qualify for a mortgage.
Warning
Scammers often try to take advantage of people with bad credit. They offer loans or credit cards to people with recent bankruptcies, but ask for up-front fees for insurance, paperwork processing or other bogus reasons. The loan or credit card never materializes and the scammer disappears. The FTC advises consumers to never give money in anticipation of getting a credit card or loan.
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