Bankruptcy Is Not the End: How to Rebuild Your Finances

If you've recently filed for personal bankruptcy protection, you're not alone. According to U.S. Courts, 416,607 filings nationwide were made in 2023, up 12% from the previous year.

Bankruptcy can be a tough time in anyone's life, leaving them worried that they may never get their finances back on track. Nothing can be further from the truth. Millions of people rebound from bankruptcy. Here's how you can, too.

Take control of your credit report

Ordering a free credit report from AnnualCreditReport.com allows you to receive a copy of your report from each of the big three credit reporting agencies -- Equifax, Experian, and TransUnion. Go over each report, line by line (they won't be identical). Ensure all the eligible debt included in your bankruptcy filing is noted on the report rather than showing up as unpaid debt. If you find any errors, dispute them with the credit reporting agency in question.

Beware of scam artists

Subprime lenders like payday lenders, title loan companies, and even pawn shops may come out of the woodwork offering you a loan. What they don't tell you is that you'll probably pay more than 400% interest on any money you borrow. Avoid them at all costs.

While you're at it, ignore any credit repair company that claims it can remove negative credit history from your report (if a negative remark is accurate, no one can legitimately remove it). They may even tell you that they can create a new identity for you. It's a giant scam. What these companies are trying to do is to make you hopeful enough to give them money. They can do nothing to help.

File the bankruptcy paperwork someplace safe

You won't want to curl up on the sofa and read the documents over and over, but you don't want to lose them, either. You may need them to prove to a collection agency that the debt was discharged in your bankruptcy case or use them when you apply for credit in the near future.

Don't be discouraged

In terms of personal finances, bankruptcy may feel like a failure, but it doesn't have to. It's probably better to think of it as a "reset," an opportunity to start over and do things differently. Starting over doesn't begin months after you've filed for bankruptcy. It begins on the way home.

Properly handled, your situation can turn around relatively fast. A 2020 LendingTree study found that among people who filed for bankruptcy, 56% already had a credit score of 640 or higher one year later. According to HGTV, if you maintain a good credit history after filing for bankruptcy, some lenders will extend credit for an auto or mortgage loan 18 to 24 months after the bankruptcy is discharged.

Begin to rebuild your credit

Now is the time to take active steps to rebuild your credit. As long as you're consistent, it's not complicated.

• Pay your bills on time: How well you pay your bills makes up 35% of your FICO® Score. Prioritize paying bills when they're due.
• Create a budget: Living without a monthly budget is like taking a trip without a map. It's there to remind you whether you're on the right track.
• Build a savings account: Life happens, and you may need an emergency savings account to dip into. Even if you can't earmark more than $10 or $20 weekly for savings, every little bit helps.
• Apply for a credit card: Credit card companies know that you can't file another bankruptcy case right away, so they may be willing to give you a card. If so, keep the balance low and pay it off in full every month. Each time you make a payment, it's reported to the credit reporting agencies, and your score is enhanced. If you don't qualify for a traditional credit card, a secured credit card can also help you rebuild credit.
• Keep your credit utilization ratio low: Credit utilization counts for 30% of your FICO® Score. It works like this: You qualify for credit but then use only a small percentage of it. As a rule, personal finance experts recommend keeping your credit usage under 30% of your credit limit. For example, if you have $10,000 in credit, you don't want to use more than $3,000 at any time. Once you pay off the $3,000, you can use up to another $3,000.
• Mix up the types of credit accounts when you can -- but slowly: Once you're sure your monthly budget is under control, slowly apply for new credit. When you do, though, try to mix it up. For example, if the only credit you have is an auto loan, consider applying for a credit card or personal loan. As you begin to apply for credit, make sure you do it slowly. Applying for too much credit in too short a time will damage your credit score.

Filing for bankruptcy is not for the weak of heart and can present a host of challenges. However, with time and a solid plan in place, you can rebuild your finances.