6 ways to recover from bankruptcy

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Filing for bankruptcy can feel like you’ve hit 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.

Despite the hardships you’ll endure, there are several ways you can bounce back from bankruptcy. Here’s what you need to know.

1. Make a budget

Budgeting can be difficult, especially if you’ve never created one or tracked your money before. But the first step in good money management is to actually manage your money.

Whether through a spreadsheet or your favorite online platform, there are plenty of ways to track expenses and income. To start, calculate all of your fixed expenses, such as your mortgage payment, home bills, insurance and anything you’re required to pay monthly. Make sure your budget can cover all of these costs.

Next, calculate your other needs, such as food, clothing and entertainment. Leave room for discretionary and emergency savings, but make sure your projected spending falls within your means.

“Planning and maintaining a budget is the cornerstone of effective money management,” says Amy Maliga, a financial educator with Take Charge America, a Phoenix-based nonprofit credit counseling agency. “In its simplest terms, a budget helps you keep track of how much money you have coming in, how much is going out, and exactly where it’s going. Following a budget helps you identify where you’re overspending and encourages you to take steps to reduce certain expenses.”

Sign up for a Bankrate account to categorize your spending transactions, identify ways to cut back and improve your financial health.

2. Start using cash

Having a limited amount of cash on hand will keep you on budget and prevent you from charging more than you can afford on a credit card.

While you don’t need to use cash for every purchase, prioritizing cash spending can help you save money. For instance, you may think twice about buying extra snacks at the grocery store if you end up being a few dollars short for necessities like eggs or milk. When your cash runs out, it’s gone.

“When bouncing back from bankruptcy, it’s important to change your spending habits,” Maliga says. “That includes transitioning to a cash-only lifestyle and minimizing your reliance on credit cards. This will be easier to do if you plan a budget and designate a set amount of money you’re allowed to spend in each category. Once you’ve spent that amount, there’s no spending in that category until your next payday, or you move money from another spending category.”

And keep in mind, using cash can be temporary for you. It’s a good step to help mitigate excess spending, and once you’ve got a grip on your budget, you can re-introduce cards.

3. Diligently pay on time

On-time payments are a major part of your credit history, accounting for 35 percent of your overall score. Late payments tell lenders you’re not responsible enough with your money. They also make lenders cautious about lending money to you in the future.

“Paying every bill on time, every time, is critical to rebuilding credit after having gone through a period of financial distress such as bankruptcy, debt settlement or credit counseling,” says Michael Micheletti, director of communications for Freedom Financial Network, a research and consulting firm. “Doing so pays off, literally.”

To help with this effort, set up a system that allows you to pay all of your bills by their due date. Many people find it helpful to set a calendar alert the day before a payment is due to avoid unintentional missed payments. Setting up auto-pay whenever possible can also help you avoid missed payments and ease the stress associated with forgotten payments.

4. Add positive accounts to your history

After getting out of bankruptcy, you may find it hard to qualify for lines of credit, a credit card or a loan. To improve your chances of getting approved for a line of credit from a lender, you can add positive accounts and current bills to your credit history. Not everything qualifies, and some bills are harder to add than others, but it can help you later on when you’re applying for new credit.

Utility companies, for instance, aren’t required to report your bills to credit bureaus since they’re not official credit accounts. But Experian offers a tool, known as Experian Boost, that allows customers to include certain utility and phone bills in their Experian credit reports to help increase their credit scores. TransUnion and Equifax don’t currently offer this service, and it doesn’t impact scores from their credit reports.

This is a helpful tool for anyone with a low or no credit score, and especially useful if you’ve filed for bankruptcy.

“Accounts with good payment history such as on-time payment have significant impacts on credit reports and scores,” Micheletti says.

5. Try a secured credit card

A secured credit card, available to those with credit scores below 600, can help people rebuild credit after declaring bankruptcy. Secured cards have a credit limit based on the cash you deposit as collateral. If you can put $250 down, that’s your limit.

You use and pay off the card like you would a regular one, but the credit card issuer doesn’t risk losing any money by issuing the card. That’s because if you fail to pay off your balance, the lender taps the cash security you provided.

“When you are ready to use credit again following a bankruptcy, you’ll want to do so carefully,” Maliga says. “A secured credit card can be a good way to do this.”

But remember: you’re looking to build up your credit profile, so it’s important to make on-time monthly payments.

To find a good secured credit card, make sure it gets reported to the major credit bureaus. Also, try to find one with low fees and flexible repayment terms. After a few months, you may be able to transition to a regular credit card with a higher limit.

6. Avoid scams

While there are some legitimate companies that can help you rebuild your credit as quickly as possible, many can’t do much more for you than you can do yourself. Companies that request an upfront fee, for example, may be trying to take advantage of consumers who are desperate to increase their credit scores. If you suspect a possible fraud on your accounts, report it to the credit bureaus.

The bottom line

Recovering from bankruptcy is entirely possible with careful budgeting that tracks your expenses and income. Adopting a few new habits — such as following a cash-only lifestyle — can prevent you from overspending and getting into trouble again.

Secured credit cards are another tool as you seek to rebuild after a bankruptcy. These cards, secured by your own cash deposit, take away the ability to overspend. But remember, the idea is to focus on rebuilding your credit score through responsible use and consistent on-time payments. A secured credit card should not be used to fund impulse purchases.

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Written by
Dori Zinn
Contributing writer
Dori Zinn has been a personal finance journalist for more than a decade. Aside from her work for Bankrate, her bylines have appeared on CNET, Yahoo Finance, MSN Money, Wirecutter, Quartz, Inc. and more. She loves helping people learn about money, specializing in topics like investing, real estate, borrowing money and financial literacy.
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