Bankruptcy and New Credit

There are two common misconceptions about filing bankruptcy:

1. If you file bankruptcy, you will never get credit again.
2. If you file bankruptcy, you have to wait seven years before applying for new credit.

Both of these statements are not true. It is possible to qualify for new credit following a bankruptcy well before seven years. Seven years refers to the length of time your first bankruptcy will stay on your credit bureau file after your discharge date (the date when your bankruptcy ends). But this does not mean you have to wait seven years before applying for new credit. In fact, for most people it is better to begin repairing your credit before the seven year mark, and there are products specifically designed to help you.

Make bankruptcy and new credit work together

• Take some time to get financially stable. Avoid using forms of credit such as payday loans that will keep you in the cycle of debt. Pay your bills on time and set some money aside to help with occasional expenses like car repair.

Taking time to get financially stable serves the dual purpose of reducing your financial stress and shows potential lenders that you can manage small forms of credit, like your cell phone bill, wisely. This shows that your financial position has improved.

• Check your credit bureau file to make sure it is updated with your correct information and discharge date (if applicable). It is far better to address any errors before you apply for new credit. Being proactive with this means that you, and your new creditors, avoid any unwanted surprises.

Detailed information on how to get a copy of your credit bureau reports, and correct any errors (if necessary) can be found on our partner trustee’s post on how to check your credit report. You have the right to review your file every year, and we always recommend checking regularly but, especially if you are planning to apply for credit.

Apply for new credit with a bankruptcy still on file

As mentioned above, there are special products specifically designed to help you rebuild after times of financial difficulty. One of these products is called a secured credit card. The term “secured” means you need to put up something of value such as money to help offset the lender’s risk. Generally, if you want a secured credit card with $1,000 limit, you need to provide the lender with a $1,000 security deposit.

You may ask what is the point? Because showing that you can use a credit card, and pay your bill on time, helps you rebuild.

Saving while you rebuild is essential

It will help you in the long run when it comes time to put money down on big ticket items, like a car or mortgage. While the balance in your savings account doesn’t affect your credit score, having a larger sum for a down payment means that you’ll have a lower loan balance relative to your income.

This means that you’re more likely to get approved for new credit, you’ll have a lower monthly payment, and my even be able to negotiate a lower interest rate.

It’s important to remember that filing bankruptcy doesn’t mean the end of your credit history. It means that you have work to do to repair it and, used correctly, new credit can help you on your way to a fresh start.