After the bankruptcy fall rebuildAfter a personal Bankruptcy under Chapter 7, the time is ripe for starting over. It is time to rebuild. Your debt is probably gone (discharged), but you also have not retained many assets beyond your car. While your credit report will keep a record of your bankruptcy for ten years, if you follow a disciplined strategy, such as the one outlined here, it is possible to improve your credit score to an acceptable level in a couple of years.

Before You Rebuild after Bankruptcy, Look at Your Mistakes

Some basic assumptions are made, about your situation. First, you have discharged most of your debt under chapter 7, and do not have a home in foreclosure. If you are trying to stop a foreclosure, that is going to take some time and effort, and of course if you lose your home that will be another mark on your credit. Another assumption is that you have done the work of getting your head straight about finances, so that you have now begun to buy only what you can afford to pay for at the time you buy it. In other words, you have become, if you were not already, a responsible adult about this. Furthermore, you have worked up a budget and are doing your best to stay within that budget. With all these in place, here is a strategy that may help you rebuild your credit after bankruptcy:

  1. Set up a savings account, if you don't have one at your bank. A credit union could also do one for you with a very small cash deposit. Have one designated account for this project, and resolve to not withdraw money from it, no matter what, until your credit reaches a score of 720.

  2. Add a little to this account each paycheck. If you can afford to do 10% that is great, but at least put in $10 each payday. Your employer may be able to set this up automatically, or your bank can arrange to have automatic withdrawals from your checking account. The advantage of the automatic withdrawals is you get used to not seeing the money leave, and it is not there burning a hole in your pocket.

  3. Get a small loan from the bank or credit union, in the range of $300-$500. The rates will probably be horrible, but that's what life with bad credit is like. Do not spend any of this money. Take 10% of the loan and put it in the savings account, and put the rest where you won't be tempted to spend it. Now pay off that loan over the next 2-4 months, $200 at a time until it is paid off. Then take out another loan, slightly larger, (probably for a better rate), and pay it off in the same manner. Keep doing this and be sure to change who you are getting the loan from, so there are several positive credit references. Ignore offers to get a second loan, do just one at a time. Do not ever use payday lenders or other sharks.

  4. Apply for a credit card. You may already have one that was not discharged at the Bankruptcy, but the rate has probably gone up considerably if you do. You should not have more than one card, and you are not going to use it for anything other than to rebuild your credit. Remember credit cards have not been your friend. Buy something small (that you really need) and pay it off completely the next month. Keep doing this, and never buy anything with this card that can't be paid off in full. Watch out for predators that will attempt to take advantage of your bankruptcy.

  5. Get one credit card from a merchant that you would shop with anyway, and again, buy something small, and pay it off the first time you get a bill. Do not get a card with an annual fee. Use this card 2-3 times and then lock it away until your credit is rehabilitated. Do this with one merchant at a time.

  6. When your credit has started to improve, get another credit card. This time you can negotiate for one with a lower rate, and no annual fee. Do not get too big a credit limit. Lock away the other card -- if that card has an annual fee, just cancel it out and apply scissors. You will never need more than one credit card, and you will always pay the balance off each month. Just trade up for a better card, with the best terms you can negotiate.

  7. This step may be the hardest. Buy something a little more expensive that you need. When your car needs to be replaced, buy a used car with payments you can afford, or if you do not need a car, buy a computer or furniture that you need. Get the best terms you can, and pay it off, but for this you will not be able to pay it off the next month. Ignore the bill, you are going to pay more than that. Take the total amount owed, and divide by ten. That dollar amount, paid over about 12 payments, will pay off the bill. If you can't afford a payment that size you can't afford to buy it in the first place. Look for a less expensive used car, or a computer with fewer features.

Using a strategy like this will rebuild your credit after bankruptcy. Long before the black mark is erased from your record, you will have rehabilitated your credit enough to begin benefiting from the good credit you have established. Then it is up to you to be mature and responsible, so you can avoid digging yourself into the same hole.


Disclaimer: All information here is intended to be educational and it is not offered as legal, psychological or other specific advice for you. Your individual situation may not apply to these suggestions, and you should seek a professional's advice which would take into account your own individual context. Photo of Bob the Builder by Geese.