Every year, thousands of Americans contend with the difficult decision of filing for bankruptcy.
According to the American Bankruptcy Institute, 764,655 Americans filed for personal bankruptcy under Chapter 7 or Chapter 13 of the Bankruptcy Code in 2016 alone. As a result of either bankruptcy filing, debts are either reorganized or removed entirely, at the cost of one’s personal credit history.
Although everyone’s circumstances for bankruptcy is different, it does not have to be a scarlet letter of financial turmoil forever. Bankruptcies remain on credit reports for only seven years, after which they are no longer considered when banks and other lenders make financial decisions. During that time, there are actions anyone in bankruptcy can take to repair their credit.
As with any challenge in life, setting goals and working step-by-step can help anyone rebuild their credit. Here are five little-known ways to rebuild credit after filing for personal bankruptcy.
1. Create a Budget and Stick To It
Even though everyone has a different reason for declaring bankruptcy, some of the most common personal habits practiced by many Americans could contribute to those situations. According to a 2015 Federal Reserve report, just under half of those surveyed said they could not afford a $400 emergency expense, and would sell a personal item or borrow money to cover it. Furthermore, one-in-four said their spending habits exceeded how much money they earned every year.
By setting a balanced budget, everyone can not only cover their bills (including housing, utilities, and food), but also save money towards an unplanned emergency. There are several tools that can get people started towards setting up a budget – but the most important part is understanding costs compared to income. Through balancing a budget and sticking to spending goals, everyone can find money to save month after month, while preventing reliance on credit availability in the event of an emergency.
2. Open a Secured Credit Card Account
After saving up some money with a bank or credit union, the next step towards recovering credit from bankruptcy is opening a secured credit account. A secured credit card account is a special type of account offered by many banks as an alternative to those who cannot qualify for a traditional, unsecured credit card. Although it may seem like a token effort, the Federal Reserve found one-in-five Americans were either denied credit, or did not receive the credit line they requested – meaning healthy, credit building habits were not reported to the major credit bureaus
A secured credit card account is limited by a deposit, which guarantees (or “secures”) the line of credit. So long as the card is open, individuals will not be able to access that money. Additionally, that secured money can be seized by the bank if the account goes into default. As a result of responsible credit usage, most banks offering a secured credit card will report all usage to the three major credit bureaus. By using a secured credit card, those coming out of bankruptcy can rebuild their financial health.