Filing for bankruptcy can feel like you’ve hit the financial equivalent of rock bottom. While it does wipe out your old debt, bankruptcy stays on your credit report for seven to 10 years, hurting your long-term chances of qualifying for a mortgage or other credit.
What does life after bankruptcy look like? There will be hardships you’ll have to endure — from cashflow management to establishing good credit and rebuilding your financial profile — but it’s possible to financially recover from bankruptcy and give yourself a fresh start.
What to do after filing for bankruptcy
It’s natural to want to put a bankruptcy behind you as quickly as possible. To get yourself on firm financial footing and help ensure you don’t run into serious financial trouble again in the future, it is important to create a solid financial foundation. Here are some of the ways to do that.
1. Save all paperwork from your bankruptcy case
Though it may not seem like a critical step, save all paperwork from your bankruptcy case. You may be asked for copies of the bankruptcy files in the future, especially when applying for a mortgage, loan, or for other financial products.
“If a lender or debt collector contacts you in the future about any of the debt included in your bankruptcy filing, it’ll be helpful to have your paperwork on hand,” says debt attorney Leslie Tayne, founder of Tayne Law Group. “In addition, if a debt collector contacts you about a debt you thought was discharged in bankruptcy, you have on-hand proof.”
2. Start saving money and build a budget
After going through bankruptcy, the last thing you want is for history to repeat itself. To help ensure this does not happen, establish good financial habits including starting a savings account that you can access during financial emergencies and creating a budget that you use to manage your income and expenses and guide your day-to-day spending. These steps can help prevent your spending from getting out of control and reduce the chances of accumulating significant debt again.
“Knowing how to manage your money is an integral part of the rebuilding process,” says Tayne. “Prevention is the best medicine, and saving money, along with budgeting, creates healthy financial habits for your present and future.”
One of the most effective ways to save money is to make doing so a habit. You can accomplish this by setting up recurring, automatic transfers to a savings account.
“With every check or payment you receive, no matter the amount, deposit a certain percentage into a savings account of some type,” says Sean Fox, president of Freedom Debt Relief. You should aim to save about 10 percent or more per paycheck, but select an amount that will allow you to comfortably and consistently keep making savings deposits.
Some employers offer the ability to direct a certain percentage of your paycheck to a designated account that is separate from the account the majority of your pay is deposited into. In addition, some banks and credit unions also allow you to create recurring, automatic transfers from a checking account to a savings account.
While creating and living by a budget can sound intimidating or perhaps even restrictive, a budget is simply a spending plan and tool that when used wisely can help you achieve future financial goals. Budgeting apps can be used to establish and maintain your spending plan, or you can use a spreadsheet, or even a piece of paper, says Fox.
3. Reestablish good credit
Reestablishing a solid credit score is another important part of your path to financial recovery after bankruptcy. There are several ways to try and do this, no matter which type of bankruptcy you filed.
- Pay bills on time. One of the best approaches to rebuilding credit is to diligently pay all your bills on time, as payment history accounts for 35 percent of your overall FICO credit score. Focus on making timely payments on any remaining debts you may have to show that you can be financially responsible.
- Open a secured credit card. If you don’t have any remaining loans or debts after filing for bankruptcy that can be used to show your ability to make on-time payments, you will likely need to obtain credit. One of the ways to get started is by opening a secured credit card. These types of credit cards are typically backed by a savings account in your name. The money in your savings account acts as collateral for the secured credit card and is generally used to establish the spending limit for the card. Consistently making on time payments on the secured card will help you to rebuild a positive credit profile. Once you’ve made on-time payments for an extended period of time, the credit issuer may upgrade you to a traditional credit card.
- Have utility bill payments reported. You can also try to have monthly expenses like utility bills, including electricity or even a phone bill, counted toward your credit history. You’ll need to check with utility companies to find out whether they participate in any services that report your on-time payments to credit bureaus. Another option is to use Experian Boost, a tool that allows customers to include certain utility and phone bills in their Experian credit reports to help increase their credit score.
- Credit builder loans. These types of loans involve depositing money into an account. The lender will keep that money while you pay down the principal and interest of the loan. The payments you’re making are reported to credit agencies.
A Chapter 7 bankruptcy will generally remain on your credit report for 10 years. You can use that time to apply the various tactics for rebuilding credit such as opening a secured credit card, consistently making on time payments for utility bills, and using Experian Boost to ensure those payments are being reported to credit agencies.
In addition, when you file Chapter 7 bankruptcy, it will discharge many of your debts, which will dramatically reduce your debt-to-income ratio. This can result in your credit score increasing somewhat over the course of a year or two.
As part of filing Chapter 13 bankruptcy, your debt is restructured in a way that is more manageable for you and you use part of your income to repay some debts for three to five years. During that time, it is important to keep up with your payment plan so that you do not lose any assets.
At the end of the repayment period, most remaining debt is discharged, meaning you are no longer responsible for continued repayment. However, the bankruptcy stays on your credit report for seven years and can lower your score by as much as 200 points. Similar to Chapter 7 bankruptcy, you can apply a variety of approaches to try and speed up the improvement of your credit profile.
4. Regularly monitor your credit reports
The idea of looking at your credit report after filing bankruptcy can be intimidating or anxiety inducing. Still, you will want to make a regular habit of doing so for a variety of reasons. It’s important to monitor reports diligently and consistently to ensure all information remaining on your profile is accurate. Incorrect information can cause your score to be lower than it should be.
“If the discharged debt isn’t showing up accurately on credit reports, it could count against you as a form of outstanding debt,” says Tayne.
Making matters worse, the debt could erroneously be transferred to a new debt collection agency which could be a challenge to resolve.
If you see an error on your credit report, you must contact the credit bureaus and the business that reported inaccurate information. Explain the situation in writing and include the credit bureaus’ dispute form and copies of documents that support your claim. Keep records of everything you send.
Once the credit bureaus receive your dispute, they have 30 days to investigate.
All evidence will be forwarded to the business that reported the information. If the business determines that the information they reported is inaccurate, they are required to notify all three bureaus so that they can correct the information. The credit bureaus must give you the results in writing and, if the dispute results in a change, an additional free copy of your credit report.
It is easy to monitor your credit reports for free online. You can download a free copy of your report from each credit bureau once per year. You can also take advantage of free credit monitoring online tools such as Bankrate or set up fraud alerts through your banks.
5. Maintain your job and home
Maintaining your job and home is an essential part of life after bankruptcy and rebuilding your financial profile and reliability. You want to show lenders that you can pay back debts such as your mortgage and that you can maintain a reliable, steady stream of income through a job.
In addition, many lenders consider your employment history when reviewing applications. Having a consistent income improves your chances of being approved for future loans. Job hopping or gaps in employment on the other hand, can make you look like a risk.
6. Make an emergency fund
If you lose your job or face any sort of unexpected financial needs, having an emergency fund can help you avoid a disastrous outcome that lands you back in debt. You’ll want to get started on creating this type of savings account as soon as possible, even if you only have a limited amount of money to contribute on a regular basis. The deposits will add up over time and making regular deposits, no matter how small, will help you establish the habit of saving.
There are a couple of common options when it comes to where to save your emergency fund:
- A savings account with a higher interest rate. Online banks are a good option because they typically offer higher yields than brick-and-mortar banks with quick and easy access to funds.
- A high yield savings account. Similar to a standard savings account, a high yield savings account pays a much higher yield on the balance in your account. Look for banks or credit unions that insure deposits through the FDIC or NCUSIF.
Having this money available after filing for bankruptcy is particularly important because you will have limited access to credit, says Tayne.
If you’re struggling to create an emergency fund, consider getting a second job or a side gig that can generate an extra stream of income.
“Working part-time at an additional job can be challenging, but when you really need to build up savings, it may need to be done,” says Fox.
7. Think of your financial future
Do you want to own a home or a car in the future? Or go back to school? After filing for bankruptcy, focusing on your financial future, including these types of life goals, can help you stick to a budget and remain motivated to continue funding your savings.
“Making good decisions about finances and managing cash flow is the best way to secure your financial future,” says Tayne.
The bottom line
While your credit score will typically take a significant hit after a bankruptcy filing, with hard work, patience and discipline it is possible to fully recover and get back on your feet. If you incorporate responsible saving and budgeting habits and work at building back your credit score, you can create a much better future for yourself.
Frequently asked questions
Can I rent an apartment, qualify for a mortgage or get a car loan after filing bankruptcy?
While it can be a challenge after bankruptcy, it’s possible to rent an apartment. A landlord will look at your level of income, whether you’ve had steady employment, your overall credit history and your bankruptcy date and discharge status. The bottom line is that a landlord wants a tenant who will pay consistently and treat the property respectfully. The best approach is to show timely payments at your current residence.
Getting a mortgage after bankruptcy won’t be easy. Both Chapter 7 and Chapter 13 bankruptcies can negatively impact your ability to get a mortgage and you will be required to wait a minimum of years, depending on the type of bankruptcy and mortgage loan. FHA and VA mortgage loans are usually available two years after a Chapter 7 discharge, or one year after a Chapter 13 discharge.
It’s possible to get a car loan after filing bankruptcy, but you may have to pay much more in interest and fees. A better idea may be to save up money to buy a used car or to use a co-signer on the car loan.
Can a bankruptcy affect future employment opportunities?
No government agency can deny you employment because of bankruptcy; however, the private industry may deny you employment because of bankruptcy if they have good cause.
Bankruptcy may cause problems for those applying for jobs that require them to deal with money, such as bookkeeping, accounting, payroll or any other role in which you manage money or financial information.