The day your Chapter 7 bankruptcy settles is a wonderful day. The process is over. Most or all of your qualified unsecured debts have literally been wiped away. You have a clean slate and can now make the fresh start that bankruptcy laws should provide. So what now? What specific measures can you take to rebuild and restore your credit so that you can build real financial strength in the future? This article outlines some Chapter 7 bankruptcy recovery steps that you can take. But make sure you have realistic expectations. Recovery from bankruptcy will take at least a few years. You have to be patient and keep working to make progress, but you can.
Step 1: budget, spend less than you make and save
While many people file for bankruptcy due to the unexpected loss of a job or medical emergency and huge bills, there are just as many people who have gotten into trouble from routinely overspending and not managing their finances well. For the latter group of bankruptcy trustees, now is the time to get better results, establish better habits, and keep a closer eye on your financial health going forward. This is probably the most important of all bankruptcy recovery steps that you take. The main aspects of this step are to spend less than you deserve, create and stick to a realistic budget and save money before the next unexpected event in life so that you can resort to a pillow when needed.
You can get help from a certified, reputable credit counseling service. Note that this type of service is not the same as for-profit operations like credit repair companies or debt settlement companies. To understand the differences and find a good credit counselor, check out this article from The Balance. You can also visit the Financial Counseling Association of America or the National Foundation for Credit Counseling. And be very careful before spending any money on any credit repair service that looks like it can “fix” your credit problems easily. For more information, see our previous article, Do Credit Repair Services Work?
Step 2: Obtaining and Responsibly Using a Line of Credit
The recovery from bankruptcy does not seem to involve taking on new debt, but it often does. Your bankruptcy credit score may already have been very low. One bankruptcy filing could have caused it to drop even further. If your Chapter 7 bankruptcy is done, your credit score won’t jump up immediately. Why not? You would think so, as you are likely to have the best debt to income ratio you’ve ever had with all of that debt wiped out. While this ratio is important when lenders are considering you for a loan, it is not very important to your creditworthiness. What plays a much bigger role in shaping your creditworthiness is your track record of responsibly using your available credit. This is what you need to move forward in order to increase your credit score.
If your primary type of debt was credit card debt, you might choose to abandon credit cards in order to pay cash for everything. However, doing so will not help improve your credit score or build a track record of responsible credit. Cash transactions are not reported to credit bureaus! Credit bureaus will be reported when you make timely monthly payments on a line of credit. And yet you have a bankruptcy red flag here on your credit report, which means that this line of credit can be difficult to obtain. Here are three ways to do this step:
Secured credit card: You give the card-issuing bank an agreed amount of money, e.g. E.g. $ 200 or $ 500, and some of that amount becomes the card’s credit limit. You can bill things and make your on-time monthly payments to build your bankroll. Should you ever miss a payment, the bank already has the money you gave them to cover the entire credit limit of the card if necessary. However, remember that the best way to build credit is to make timely payments every month. It’s also a good idea to pay off the balance in full each month. Keeping a balance month-to-month is not a big problem as long as you make at least the minimum payment on time, as the total amount of the loan is very small. But it’s still better to pay it off in full every month, especially because the interest rate on this type of card will be quite high.
Bankruptcy Car Loan: Another option for building a loan would be to apply for a loan such as buying a used car. Many lenders see your Chapter 7 bankruptcy as a big red flag and turn your application down. But there are other lenders who work with bankrupt customers. They understand your situation and are willing to take the risk of lending you a loan even though you end up with a higher interest rate. Day One Credit specializes in helping customers with pending or released bankruptcy find a bankruptcy loan to finance the purchase of a used car. Once you have a new line of credit after bankruptcy, the key is to use it responsibly by making timely payments every month.
Credit Builder Loan: This is a special type of loan that most major banks don’t offer, but is often available from a credit union or community bank. The lender agrees to lend you an amount of money (usually less than $ 1,000) but does not give you the money. Instead, the money is transferred to a savings account he controls. This is an installment loan. As long as you make the monthly payments on time, you will get all of the money back at the end of the loan. All payments made along the way are reported to the credit bureaus. Help build your credit score and history. As with everything else suggested in this article, you need to make your monthly payments on time every time for it to have a positive impact on your bankroll. Late payments affect your creditworthiness. Not only is a credit builder loan a great way to build your credit, it will also help you save money over the course of the loan. For more information on this type of loan, please contact Credit Karma at Credit Builder Loans: What They Are And How They Work.
Step 3: Monitor Your Credit Score and Correct Your Credit Report
Many people miss this third of our bankruptcy steps. You should keep a closer eye on your creditworthiness than probably ever before before filing for bankruptcy. You need to be able to see that score and how it changes in order to know what you are doing makes a difference. This means that you can see your credit report and score more often than the free annual check that everyone is entitled to. You should look at your score and report it monthly. One way to do this is to sign up for a free credit monitoring service. Experian is one of the Big 3 credit bureaus and provides free monthly access to your credit history and report, as does Credit Karma to the other two credit bureaus (Equifax and TransUnion). This monitoring helps you to keep track of your creditworthiness. However, it is up to you to identify and correct any errors in your credit report.
Recover from Chapter 7 bankruptcy with the help of Day One Credit
Recovering from bankruptcy can feel like a daunting task, but with a little patience and smart decisions, you can do it. If you’ve recently dismissed your Chapter 7 bankruptcy and need to buy a used car, you may be nervous about whether or not a lender will work with you when they see the big red flag of bankruptcy on your credit report. Many lenders can turn you down because of your bankruptcy, but not all lenders! The first day built close working relationships with a network of reputable lenders willing to consider lending to someone with a recently laid bankruptcy. When you meet our guidelines and are approved, you have a great way to build your credit back by making timely monthly payments on the bankruptcy loan found for you, not to mention the car you need! Do you have any questions about how this works? Check out our general questions page or contact us and we’ll be happy to explain your options!
At Day One Credit, we are experts in finding the best possible bankruptcy loans to help our customers buy quality used cars. We are not lawyers, we do not give legal advice and nothing we say should be taken as legal advice. Your first step in relation to bankruptcy should always be to seek advice from a qualified bankruptcy attorney.
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