How to Rebuild, Recover, and Regain Control of Your Finances
In almost every initial bankruptcy consultation that I conducted, some variation of two questions were always asked; “How long will bankruptcy stay on my record?” and “Will I ever be able to rebuild my credit again?”. Very reasonable questions from someone considering filing for bankruptcy protection. Thankfully, bankruptcy was designed to provide debtors with a fresh start, not a lifetime sentence without credit. Additionally, the credit markets are very forgiving when it comes to a bankruptcy filing, so long as the actions taken after that filing are reasonable and appropriate. Here I will discuss the most prudent steps to take after your bankruptcy is discharged to restore your credit as quickly as reasonably possible. Please keep in mind, there are no quick fixes once you have asked a federal court to discharge your debts, but by taking the correct actions and being mindful of your finances moving forward, you can recover more quickly than you likely believe possible.
The first question is very easy to answer. A Chapter 7 bankruptcy filing will remain on your credit report for ten (10) years from the date you file. A Chapter 13 bankruptcy filing will remain on your credit report for seven (7) years from the date you file. It is extremely rare that a bankruptcy filing can be removed from your credit report once filed voluntarily. It is likely that upon receiving your discharge, you will get a slew of offers from “credit rebuild” organizations promising, among many unrealistic things, to remove the bankruptcy from your credit, for a reasonable fee, of course. Do not fall for it. You can rebuild your credit, and I am about to tell you how, but you will not be able to remove it from your credit report and there are no magic ways to hasten the process.
Once you receive your bankruptcy discharge, either from a Chapter 7 or Chapter 13 filing, you will find that a huge burden of stress has been removed. The debts that you have been struggling with, likely for years, are now gone and your paycheck once again belongs to you. You have received your fresh start, now you need to maximize this opportunity by taking the right steps.
Step 1: Pull all three of your credit reports and review them for accuracy. There are three major credit reporting bureaus, Experian, Equifax and Trans Union. You can visit each of their websites and pull the reports or go to a single site, such as AnnualCreditReport.com, to pull all three in one series of actions. Under current law, you are entitled to one free copy of your credit report from each bureau every week.
You are specifically verifying that all debts that were discharged in your bankruptcy case are properly listed with a zero balance and reflect “discharged in bankruptcy”. In addition, you want to ensure that any debts that survived your bankruptcy, such as a mortgage or car loan, are reflecting your ongoing payments accurately. If you have any debts that survived your bankruptcy that are not on a payment plan, reach out to those creditors and get them onto a payment plan immediately. This will allow you both to budget for these payments and have them reflected on your credit report, helping to rebuild your credit.
If there are any reporting errors on your credit reports, dispute them immediately. The process of disputing errors is laid out clearly on the credit reports themselves and generally involve sending a dispute letter to the credit reporting bureau at a specific address with details about the error in reporting. The bureau is required to contact the creditor, confirm the information and correct it quickly. If the bureau fails to do so, contact your attorney, as the creditor, the bureau or both may be in violation of both the bankruptcy discharge injunction or federal and state credit reporting laws such as the Fair Credit Reporting Act. Your attorney can advise you and take the appropriate legal actions necessary to recover damages for these errors.
Once you are confident that your credit reports are accurate, you should pull them with a degree of frequency to ensure that they remain accurate. Most attorneys recommend pulling them every three to six months, at minimum once a year, to ensure that your credit report remains accurate. You may be tempted to subscribe to one of the several credit monitoring and protection services available these days, but you just got your discharge in bankruptcy and do not need that extra expense, which brings us to step 2.
Step 2: Prepare an accurate and complete budget, then live by it. I have no doubt that you heard this countless times prior to filing for bankruptcy protection and the circumstances you were in simply did not allow for it. Your bankruptcy discharge has changed that and made it the perfect time for you to start fresh with a budget.
You do not have to start from scratch either. Get a copy of Schedules I & J from your bankruptcy petition, as these are schedules that include your budget in bankruptcy. Schedule I is your income, which should be extremely accurate unless your situation has changed or you have income that was not required to be disclosed in your bankruptcy. If either of those are true then make the appropriate adjustments so that your income is completely up to date and you are accounting for every dollar. Include tax refunds, bonuses from work and even regular cash gifts received (the $5 from grandma every birthday counts), even if you have to estimate them (if so, estimates should be conservative to ensure that you meet your budget).
Schedule J is your expenses. Again, this should be a very good starting point, as it will contain at least the minimum you need for all basic expenses. Two items need to be added to your Schedule J expenses to make your budget actually effective. First, you need to add an emergency savings amount. More about that next. Second, you need to account for upcoming planned expenses. You are no longer in bankruptcy, so you are allowed to spend some money on discretionary items (vacations, dining out, shoes, whatever your thing may be), but you have to plan for these discretionary spending items to avoid going back into debt.
The bottom line of your budget must be zero. Every dollar of income must be included and every expense scheduled. If the budget is negative, you need to find areas to reduce your expenses or find some gig work to increase your income, as a negative budget will lead to getting into debt again. If there is extra income at the end of the month, include it somewhere in the budget as an expense. Additional savings are an excellent place to account for these funds. Financial experts advise not to have too much in cash savings, as it keeps the money from “working for you”. That advice is not meant for someone recovering from a bankruptcy filing, save as much as you can afford to while keeping up on your bills.
There are countless budgeting tools out there to assist you in this process. Your attorney can provide the basic budget forms from your bankruptcy schedules and you can slightly modify them. There are many free budget forms available online, many from governmental and non-profit organizations. The internet is replete with online budgeting tools, many of which are free and very good. However you choose to create your budget, getting it done is the most important first step.
The next step is to follow it. As burdensome as it sounds, for the next three months you should track every dollar you spend, from paying the rent to buying a cup of coffee when you are running late to work. This is not just a paperwork exercise to ensure that you are following your budget. Two things should immediately jump off of the page. First, you missed a couple of expenses. You included the car payment, insurance and gas, but forgot to include the semi-annual oil change. Second, you will find areas where you can cut expenses. It will not take long to figure out that the $5 cup of coffee you buy every morning, on average, adds up to $330 after three months. $330 buys you a pretty nice coffee maker, travel mug and enough quality coffee to make you happy, with money left over. Nobody likes having to make these decisions, but almost everyone on the planet has to in order to keep their finances in the black.
Step 3: Create and build an emergency fund. To be blunt, this is not optional if you truly want to recover from your bankruptcy filing. It is said that the majority of Americans are unable to pay for an unexpected expense over $400 and must incur debt to pay that expense. When recovering from a bankruptcy, you cannot find yourself in that position.
As soon as you are able to, go to your bank (or find a bank if you do not have an existing account anywhere) and open a completely separate savings account. Within your budget you will have allocated a certain amount per month to put into that account and you must do so. Even small savings amounts, $10 per paycheck, will accumulate over time into substantial balances. You cannot touch these funds unless it is a true emergency. If and when you find yourself with extra funds, from unexpected overtime or a larger than budgeted tax refund, put the excess into your emergency fund until it is fully funded.
Most experts agree that a fully funded emergency savings fund is enough for you to cover at least three, preferably six, months’ worth of all ordinary expenses So if you spend $4,000 per month between rent, car payments, groceries, etc., you will need at least $12,000 and preferably $24,000 in your emergency fund to be considered fully funded. Of course it will take time for you to get there, but this is absolutely vital to maintain your financial health going forward. One often recommended motivator is to set specific targets, then provide yourself with a reward. If your immediate goal is $12,000 in savings, allow yourself to reward yourself for every time an additional $3,000 is saved. After a few months, you will not need this motivation, as the comfort and security that the savings fund provides will be enough motivation for you to continue contributing to it.
Step 4: Start responsibly using credit again. Wait at least six months, preferably one year, from the date of your discharge to start this process. The offers for credit that you will receive immediately after your bankruptcy discharge, and you will get plenty of offers, are generally the lowest tier of credit with the worst terms and interest rates allowed by law. Focus first on preparing your budget and start building your emergency fund.
Eventually, however, it will make sense to start incurring credit, particularly if you did not carry any secured debts through your bankruptcy like a mortgage or car payment. Your credit score recovers most quickly when you are building a record of timely full payments. If you do not have any payments to be recorded, or only have one, then it is difficult to rebuild your credit score as quickly. Be cautious as you go through this process.
The most common and effective way to use credit to rebuild your credit score is to obtain a secured credit card. These are credit cards where you will put down a deposit against your line of credit, often starting at dollar for dollar and then having the credit line increase over time with responsible use. So initially, you deposit $300 with the credit card issuer and they issue you a card with a $300 limit. Now here is the key, you want to use this card every month to pay for necessary expenses up to about 30% of the line of credit, $100. Then you absolutely must pay that full balance off at the end of every billing cycle, never carrying a balance month to month. It is this sequence of usage followed by full payment that will rebuild your credit score most quickly. If you carry a balance, credit issuers will have concerns that you did not change your ways after your bankruptcy filing and are accumulating more debt that you cannot afford to pay back.
It is also worth looking into getting a “credit rebuild” loan. Often issued by credit unions or smaller local banks, these are not traditional loans. Instead of the issuer giving you the amount borrowed, then you paying it back with interest, a credit rebuild loan has you making a fixed monthly payment to the issuer to start. They report these payments on your credit. At the end of the term, usually one or two years, the issuer keeps their interest charged and refunds you with the balance of your payments, so it not only serves to rebuild your credit score, but also increases your savings longer term. Again, the key is making sure that you make every payment timely, as you do not want any negative reporting on your credit.
Step 5: Plan for the long-term with SMART goals. SMART is a commonly used acronym in goal setting:
S – Specific: “I want to save $5,000 for a car down payment.”
M – Measurable: You can track your progress each month.
A – Achievable: The goal fits your budget.
R – Relevant: It supports your financial stability.
T – Time-Bound: You have a clear deadline.
Using SMART goals for your long-term objectives will help you stay within your short-term budget and credit rebuild plan.
Step 6: Have patience. Rebuilding your credit and getting yourself back onto firm financial ground will take time. There are no legitimate shortcuts and trying to work around the system will just lead you into more trouble. That said, if you do all of the things outlined above, your credit score will start to recover immediately after your bankruptcy discharge and recover fully within two – four years. The bankruptcy will still be on your record, however your potential creditors will see that you have been managing both your finances and your credit responsibly and be willing to take the risk that you will continue to do so.
There are a few constants that you need to keep in mind as you go through this process. The earlier you incur credit after your discharge, the higher the interest rate will be. Interest rates are based on the risk to the lender and the closer you are to your bankruptcy, the higher the risk. The more that you are seeking to finance, the longer it will take to get financing approved. Most people can finance a car within two years of their bankruptcy discharge (less if they are willing to pay a higher than market interest rate), but find it will take four years to get approved for a mortgage. Finally, less is more when it comes to open lines of credit. It does not benefit you more to open multiple secured credit cards and may negatively impact you if you go to far, as creditors will believe that you are seeking to get back into debt again. One or two secured lines of credit are plenty to rebuild.
Bankruptcy is not a decision to be taken lightly, as the damage to your credit is significant. If it is the right course of action for you, however, it is not the end of your credit. If you use a bit of discipline, follow the steps outlined above and have some patience, your credit will recover, often sooner than you may expect.
