It is a common misconception that bankruptcy will destroy a person’s credit for several year. Many of my Arizona bankruptcy clients think that restoring credit after bankruptcy is difficult or impossible. In fact, while bankruptcy may reduce a person’s credit score (depending on how high it is before bankruptcy), the credit score can be improved shortly after bankruptcy.
When we talk about restoring credit after bankruptcy, we need to distinguish two very different approaches. The first approach involves reviewing your credit report to make sure that all reported items are accurate, and disputing any inaccuracies. The second approach involves re-establishing a positive credit history.
Dispute inaccuracies on your credit report
To start, you should pull your credit report. Each legal resident of the U.S. is entitled to a free copy once every twelve months under the Fair and Accurate Credit Transactions Act. You can get this free report at annualcreditreport.com. If there are any inaccuracies on the report, you can and should dispute those inaccuracies with the credit reporting agency. The law that gives you the right to do this, and establishes the procedure for disputes, is the Fair Credit Reporting Act (15 U.S.C. § 1681). Generally, your dispute should be in writing, and provide sufficient information to explain why the information you are disputing is inaccurate. Under 15 U.S.C. § 1681i, the credit reporting agency generally has 30 days to investigate the disputed information, and if the information is found to be inaccurate or cannot be verified, then it must be deleted from your credit report. This dispute procedure can be used by anyone, not just those who have filed for bankruptcy.
Re-establish positive credit history
There is only one way to re-establish a positive credit history, and that is to borrow money (i.e. use credit) and to timely make payments on the borrowed money. Of course, you have to borrow from someone who will report the transaction and your payments to the credit reporting agencies (so borrowing from your family members won’t help). The simplest way to do this is to obtain a credit card. While it may seem like it would be impossible to get a credit card after bankruptcy, the opposite is usually the case. In fact, many, if not most, debtors start receiving credit card offers almost immediately after their bankruptcy is over. These credit cards may come with a high interest rate, but remember, the purpose of using a credit card after bankruptcy is not to finance your purchases or living expenses, but simply to establish a credit history. So, you should use your credit card to pay for several small purchases over any given month (e.g. gas, groceries), and pay off the balance in full every month. Do not max out your credit card. In fact, keep your balance low relative to your overall credit limit. Do this consistently and without missing any payment deadlines.
What if you are one of the people who cannot qualify for a regular (unsecured) credit card? You still have options. You can apply for a secured credit card, which basically means that you must deposit cash in the bank in order to obtain the credit card. Another option would be to become an authorized user on a family member’s credit card. If you choose either one of these options, make sure that the bank reports the secured card or authorized user activity to the credit reporting agencies.
The bottom line on rebuilding credit after bankruptcy
Sometimes bankruptcy is unavoidable, or is the simplest and most cost-effective way to deal with mounting financial difficulties. Filing for bankruptcy, however, does not mean that your credit will be ruined for the next seven or ten years. Your credit score may not improve overnight. But if you take the steps discussed above to correct your credit report and re-establish your credit history, you should see an improvement in your credit score much sooner than you expect.
The above is provided for general informational purposes only. It is not intended to and does not constitute legal advice, and does not create an attorney-client relationship. If you need legal advice for your specific situation, you should contact a qualified attorney in your area.