Bounce back fast after bankruptcy

By Liz Pulliam Weston

Anita Burleson has had trouble getting credit since her bankruptcy two years ago, but she knows that's not true for every filer. The fact that there are repeat bankrupts tells her that.

"When I was in bankruptcy court, there was a couple that had filed for bankruptcy twice prior to this one," said Burleson, who lives in Emerson, Ark. "How could they get enough credit to get them into this much debt (three times)?"

Actually, almost anyone can get credit soon after a bankruptcy. It's just a matter of knowing how.

It's true that bankruptcy deals a devastating blow to your credit and your credit score, the three-digit number lenders use to gauge your creditworthiness. But the effects don't have to be lasting. Long before the bankruptcy drops off your credit report, you could be qualifying for loans with good rates and terms.

Nothing is forever

Ken from Chicago filed Chapter 7 liquidation after unemployment and overspending caused him to rack up more than $20,000 in credit card and other unsecured debt. Four years later, his credit scores ranged from 655 to 719, decent numbers that are just below the cutoff to get most lenders' very best rates.

"I . . . applied for a secured credit card (usually reserved for people with troubled credit) and was informed that I qualified for an unsecured card -- a possibility I hadn't even considered," Ken said. "While I am going to be very careful with my new credit (card), I am heartened that creditors consider me an acceptable risk."

If you're a recent bankrupt, here are two things you need to keep in mind:

• Nothing in credit is "forever." A bankruptcy legally can remain on your credit report for up to 10 years, but its effect on your credit score can start to diminish the day your case is closed -- if you adopt responsible credit habits such as paying your bills on time, using only a small portion of your available credit and not applying for too much credit at once.
• You have to get and use credit to build your credit score. Living on a cash-only basis may be a smart choice for those who really can't handle credit. But if you want to rebuild your credit score, you can't sit on the sidelines.

Learn from your mistakes

Although repeat bankrupts show that getting credit after a Chapter 7 or 13 filing is possible, you shouldn't want to emulate those who file more than once.

At first glance, people who file more than one bankruptcy seem to be beating the system: They run up big bills and then walk away.

Think about it a little more, though, and you'll see these multiple bankrupts are really defeating themselves. Their debts and credit history often mean they're paying out big bucks in high interest payments during the time when they're prohibited from filing another bankruptcy. (The 2005 bankruptcy law provides that, under Chapter 7, eight years must elapse before you can refile. If you go for Chapter 13 after a Chapter 7, you must wait four years. Going from one Chapter 13 to another, two years must elapse.)

And most people can't file for Chapter 7 liquidation if they have significant assets to protect, such as home equity or savings. So these folks who are repeatedly going broke often have little to show for all the money that's leaving their pockets. Instead of building wealth over time, they're losing ground.

Instead, use your bankruptcy as a wake-up call to figure out what's wrong with your finances and fix it.

• If your problem was overspending, you'll find plenty of information on this site about creating and sticking to a budget. (See our Decision Center: Managing your budget).
• If you didn't have enough savings to survive a job loss or other setback, get serious about establishing an emergency fund.
• If you were sunk by medical bills, seek a job with insurance coverage or check to see if your state offers coverage.

Clean up your credit report

One of Burleson's biggest problems is that her credit reports still show several accounts as open and overdue -- when in fact they were closed and the obligations wiped out as part of her bankruptcy.

In order for her credit to recover, she needs to contact the credit bureaus and insist that those accounts be properly reported as "included in bankruptcy."

If you have other serious mistakes on your credit report, those need to be corrected as well. Your credit score is based on information in your credit report, so errors on your report can seriously dampen your score.

Get a secured credit card

You need two types of credit to quickly rebuild your credit score:

• Installment: auto loans, student loans or mortgages
• Revolving: credit cards or home equity lines of credit

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