How to bounce back after bankruptcy

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(MoneyWatch) Earlier this week I wrote about individual bankruptcy filings and why people typically file. Whether folks who are in serious financial difficulty should file bankruptcy is a personal decision and there are many who have a view on this.

But getting unbiased advice on whether your should file for bankruptcy is tricky. Non-profit consumer counseling services typically get their funding from bankcard companies who are most interested in being paid in full. On the other hand, seeking the advice from an attorney who earns their fee from getting you through the process is also a conflict. While both can be good sources of education, individuals should make their own decision and get an opinion from another financial professional who has no conflicting interest in the decision either way.

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How bankruptcy affects you
Chapter 13 bankruptcy filings that are completed and dismissed will remain on an individual's credit report for seven years. This is similar to the reporting period for "late pays" or delinquent accounts posted on your credit report, which is also 7 years. The more serious Chapter 7 bankruptcy will remain for up to ten years.

Having "bankruptcy" show up on your credit report can make buying a car or house, renting an apartment or even getting a job in some sectors very difficult. When you do finally get a loan, the rate charged will be "subprime" which is industry jargon for higher than what is typically charged to borrowers with a good credit history.

But surprisingly, after filing bankruptcy, getting a credit card is not impossible. What credit card companies know is that individuals are not permitted to file for bankruptcy again for six years from the date of their last filing (for certain Chapter 13 discharges, the six year bar is waived). Creditors also know that a recent bankruptcy survivor has had plenty of remedial financial counseling, is more experienced with debt and is eager to begin rebuilding their credit, which makes them a good potential customer.

Bankruptcy and beyond
The first step is to re-establish and maintain a good credit report going forward. There is not much you can do about the past. The most important thing for individuals to keep in mind is that while there is nothing you can do about your credit history, you are in the driver's seat when it comes to building your credit future. Here are some of the steps to follow:

Obtain and review a copy of your credit report. Obtain a copy of your report from all three credit reporting agencies, Experian, Equifax and TransUnion.

Review all information on the credit reports and correct any discrepancies.

Submit an explanatory statement of up to 30 words to the credit report agencies. Include your reasons for financial difficulty, what you have done to put your financial problems behind you and what you will do to be financially responsible in the future. This will appear on your report until you request that it be removed.

Establish a new source of credit by getting approved for a credit card. Typically the easiest to get is a secured card. You'll need to demonstrate that you are credit worthy and can responsibly use credit. Ideally, a card from a national bankcard company is best but any credit card will do.

Use the credit card by charging only for items that you already have the cash to pay for in full. Pay off all charges in full before any interest accrues. This process will ensure that timely payments are added to that account's history on your report.

Obtain and review your credit reports annually.

The bottom line is that financial difficulties usually don't happen overnight. The process of rebuilding and improving your credit history will also take some time.

  • Ray Martin

    View all articles by Ray Martin on CBS MoneyWatch»
    Ray Martin has been a practicing financial advisor since 1986, providing financial guidance and advice to individuals. He has appeared regularly as a contributor on the CBS Early Show, CBS NewsPath, as a columnist on CBS Moneywatch.com and on NBC-TV's morning newscast TODAY. He has also appeared on the Oprah Winfrey Show and is the author of two books.

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