How to save your credit in bankruptcy

Today, after watching some NFL games, I suddenly became curious about bankruptcy, so I did a quick google search and the first figure I found was astonishing. According to official records, in 2013 there were over 1 million non-business bankruptcy filings. 1 million. 1,000,000. On average, for every 300 people in the US you know, 1 of them filed for personal bankruptcy last year. This figuratively blew my mind.

So the topic for my blog post today was quickly decided.

You know, life happens. Someone in your family falls critically ill and you have to borrow money to pay for medical expenses without being able to pay it back. You lose a job because of the financial crisis and can no longer pay your bills. I offer my condolences to those that have a legitimate reason to file for bankruptcy. The road ahead, credit-wise, is going to be tough. Bankruptcy stays on credit reports for up to 10 years, and this is not the kind of record you want on your credit profile. Lenders that see bankruptcy when reviewing your credit report will not be very likely to extend you credit.

So, if bankruptcy is inevitable, how can you minimize its negative impact on your credit?

The most important thing to do is to re-establish credit as soon as possible. Right after the bankruptcy is finalized and the debt gets discharged, you need to get a credit card right away. At this point, you still have the positive credit history to balance with the new bankruptcy; the creditor will look at your entire credit profile, not just the bankruptcy, to determine your creditworthiness. The longer you wait, the more difficult it will be to get a credit card since the positive history will be further in the past.

For the first card, you want a credit card that is non-secured. You are not building credit from scratch; you are rebuilding credit. The first credit card’s purpose is to help you get a second one. A non-secured credit card serves this purpose better. Credit One offers credit cards that are bankruptcy-friendly. Do not mind their annual fee or interest rate; you are not going to keep this card past the first year. But since they charge interest on the day purchases are posted, you should pre-pay for your purchases by making credit card payments from your banking account to minimize interest charges. If you don’t like the inconvenience, only charge a small amount each month and always pay off the monthly balance.

3 months in, apply for a personal loan from a credit union. Credit unions sometimes have “credit builder” loans and are typically more lenient than banks. You do not need a big loan, but try to extend the duration for as long as you can, and always make payments on time. Again, do not mind the interest rate. You’re paying a few bucks per month to save your credit. It’s worth it.

6 months in, apply for a Capital One non-secured credit card. You can choose among the credit cards for average credit, but I personally recommend the Quicksilver which gives you cashback rewards and offsets the annual fee. This is assuming that you did not burn Capital One. If you did, I would apply for a non-secured credit card with a credit union.

12 months in, apply for the Discover It if you did not burn Discover. If you did burn Discover, apply instead for the Barclaycard Rewards Mastercard. If things go well, you should be approved for either of them. Once you get the new card, cancel the Credit One card to avoid paying the annual fee.

At this point, you have 2 active non-secured credit cards and an open installment loan, and should have a FICO credit score in the mid-600’s. This is the end of the initial phase of your credit rebuilding.

You absolutely have to maintain perfect payment records with these credit cards and loans which are the pillar for your credit rebuilding process.  Do nothing else and let your accounts age for 6 months. After this, the bankruptcy will have aged and your credit cards will have matured. At this point, you can start applying for other, non-secured credit cards and loans from banks and credit unions that you did not burn with the bankruptcy. Your credit rebuilding is basically done. After just 18 months.

Yes, it is possible to go back to good credit 18 months after bankruptcy. You need to have had good history with creditors before the bankruptcy, and you need to start rebuilding right after the filing. And it goes without saying that you need to maintain perfect payment records throughout this 18-month period.

Luckily, I have never had to file for bankruptcy, and hopefully never will. This guide has been put together through my observation of other people’s experiences. Most, if not all, bankrupt people that went through variations of this path were successful. If you follow this guide and hit a bump, let me know and we can figure an alternative route.

Best of luck,
-Richard

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