How to Recover From Bankruptcy

When you have no alternative but filing for bankruptcy, there are paths for financial recovery and credit repair afterward.

How to Recover From Bankruptcy
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Overview
Having to file for bankruptcy is financially and often emotionally devastating. But once the court proceedings are done, it is time to start the recovery process. If you find yourself in this situation, there are actually some factors that work in your favor. True, the bankruptcy is on your credit history and will be there for 10 years. Much of the other negative information is expunged as part of a bankruptcy, however. In addition, some lenders are willing to give you a chance because the law prevents you from again taking the bankruptcy route for eight years. You can realistically hope to have a good credit rating within one to two years.
Step 1
Take the time for some self-evaluation. You should contact a nonprofit credit counseling service and work with a counselor to identify things you can and should do differently in the future. You can find a credit counseling service in your area to help you by calling the National Foundation for Credit Counseling (1-800-388-2227) or Consumer Credit counseling Services (1-888-656-2227) or through their websites (links below).
Step 2
Chart a clear plan and goals for your future use of credit through a step-by-step plan. For example, you may want to buy a first home in a few years. Because this is such a large investment, your use of credit should be limited so you don't acquire a lot of debt, but yet enough to establish a record of consistently handling credit well. In short, establish specific objectives and use credit to achieve those goals. Avoid the temptation to "get a credit card and go shopping" and other traps that can again leave you saddled with unwanted debt.
Step 3
Monitor your credit record. Each of the three major credit reporting companies (Equifax, Experian and TransUnion) maintains a separate credit history on you based on reports by creditors. Errors on these reports can be costly and lower your credit score. You are entitled to a free copy of your credit history from each company once a year. Check your credit history for accuracy and have any erroneous information corrected. To order your free reports, go through the Federal Trade Commission's authorized source. (There is only one firm so authorized to provide free reports.) There's a link to the FTC website below.
Step 4
Get a secured credit card. "Secured" means you make an initial deposit with the credit card issuer as collateral. As you make on-time payments, the credit limit will be raised. Keep in mind these cards are expensive, with annual fees and high interest rates. For the consumer, they are a means of creating a record of timely payments, and any other use is probably a waste of money, so keep the balance to a minimum.
Step 5
Learn how credit ratings work. Your credit score/rating (also called a FICO score) is a number between 300 and 850 that summarizes your credit risk as a borrower. Paying bills on time is vital to having a good credit score (this is 35 percent of a FICO score). The second most important factor is how much money you owe compared with your income. Opening or closing credit accounts frequently is a negative. (Lenders view this as a sign you aren't managing your finances well.) Making limited use of credit and being selective about what accounts you have help raise your credit rating. It will take about one to two years to establish a good credit rating as you recover from bankruptcy.
skill
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Up-to-date credit reports

Secured credit card

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Up-to-date credit reports
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Secured credit card
tip
If one of your long-term goals is home ownership, contact the Federal Housing Authority (or the VA if you are a veteran). As of 2009 they require only a 620 credit score, but are flexible. Both agencies take other factors into consideration, and part of their mission is to work with people who have had credit problems in the past, including bankruptcy.
tips
If one of your long-term goals is home ownership, contact the Federal Housing Authority (or the VA if you are a veteran). As of 2009 they require only a 620 credit score, but are flexible. Both agencies take other factors into consideration, and part of their mission is to work with people who have had credit problems in the past, including bankruptcy.
warning
Exercise caution when borrowing. Some predatory lenders target people who are just out of bankruptcy, knowing they are eager to get credit. Take your time and check out lenders carefully before you sign anything.
warnings
Exercise caution when borrowing. Some predatory lenders target people who are just out of bankruptcy, knowing they are eager to get credit. Take your time and check out lenders carefully before you sign anything.
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Resources
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Recovering from Bankruptcy
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The Scoring Game
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FHA and VA Credit Score Requirements
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Free Credit Reports
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Consumer Credit Counseling Services
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National Foundation for Credit Counseling