Deanna German’s slide into bankruptcy was gradual. First she was laid off. She found another job, but was laid off again. Meanwhile she tried to help her adult son pay some medical bills, keep up with her credit card bills, and pay the mortgage on her “really small” condo in San Diego. By May of this year her unemployment benefits had run out, but she still couldn’t find another job.
“I just don’t have any other choice,” says German, 50. “I can’t pay my bills.”
Now German is nearly ready to declare bankruptcy. She found a lawyer who advertises himself as 1KBK, which means he handles a bankruptcy case for $1,000. “Don’t you love it?” German says. “It sounds so cheesy.”
She already has paid Mr. 1KBK a deposit; as soon as she raises the rest of the money, he will file her case and German’s bankruptcy will begin in earnest. She plans to file for Chapter 7, which will stay on her credit report for ten years from the day she files.
But she wants to be ready. Her question is simple: “What’s the fastest way to rebuild my credit score after bankruptcy?” she asks. “I want to rebuild and go back to a normal life.”
We put that question to Gerri Detweiler, Credit.com’s consumer credit expert. The bad news, Detweiler says, is that the bankruptcy is going to do some pretty severe damage to German’s credit. The good news is that the damage doesn’t have to be lasting.
“If she manages to do things right after the bankruptcy, she has a very good shot at boosting her score,” Detwiler says. “By the time the bankruptcy comes off her credit report, she could have great credit.”
A bankruptcy puts you in a whole different class of people. After a bankruptcy, the lenders and consumer credit companies that perform credit scoring will compare you to other people who declare bankruptcy, not to the population as a whole.
That’s great news, Detweiler says, because it means that as German rebuilds her score, she won’t have to compete against people with sterling credit. Which means that if she handles her finances well, she may make quicker strides towards building her credit by taking the big hit of bankruptcy than if she simply soldiered on with all her current debts.
“It’s not like everybody is treated the same,” Detweiler says. “She’s in the same group with other people who’ve been through serious financial problems.”
With that in mind, here are tips from Detweiler for German and everyone else hoping to rebuild after bankruptcy:
1) Keep any manageable debts you can. In most cases, student loans can’t be discharged by bankruptcy. Other times, the consumer may choose to continue making payments on a car loan. Assuming that you can afford the monthly payments, Detweiler says, it makes sense to keep some older debts after your bankruptcy, because repaying them will help you rebuild your score faster.
“Anything like that will still help her rebuild her credit,” Detweiler says.
Unfortunately this tip won’t help German, who lost her condo to foreclosure, and who has no student or car loan.
2) Get secured. For people with damaged credit, the easiest way to get a loan is with a secured credit card. The consumer pays a cash deposit upfront, and this deposit is used as collateral. German can use the card to pay for things she would buy anyway, like groceries or gas. As long as she pays the balance in full every month, she won’t incur any new interest charges. And the monthly payments are reported to the big three national credit bureaus, which helps her rebuild her credit.
3) Retail therapy. After secured cards, a retail card is the second easiest type of credit for a person with damaged credit to get. “After six months to a year of paying a secured card on time, she can maybe get a retail card,” Detweiler says.
The same rules apply: Buy only what you would anyway if you were paying cash, and pay the balance every month to avoid interest charges.
4) Gradually go back to normal. Over time, by paying your secured and retail cards off every month and rebuilding her credit, German will find that she can get other loans including regular credit cards, car loans, even a mortgage. She may have to pay somewhat higher interest for as long as the bankruptcy remains on her credit report. But that doesn’t mean she’ll be locked out of credit for the next ten years.
“As long as she’s proactive about rebuilding her credit, she likely will be pleasantly surprised with how much easier the process is than she thinks,” Detweiler says.
Image: Valerie Everett, via Flickr