Building Back Your Finances Post-Bankruptcy

If you’ve filed for personal bankruptcy or are thinking about it, you may be wondering how you can rebuild your finances. Bankruptcy can have significant effects on your credit, your budget and your overall financial well-being — but you can certainly recover. All it takes is some careful planning. 

You likely have many questions. What does bankruptcy do to your credit? How does filing bankruptcy affect you? How can you strengthen your finances post-bankruptcy? This guide will explore all these questions and more, to help you get back on your feet. 

What does bankruptcy do to your credit? 

Knowledge is power. Before making a recovery plan, it’s helpful to know what to expect when it comes to your credit.

In general, bankruptcy can be devastating to your credit score and overall creditworthiness. 

Those with good credit scores (700+) may see their credit score drop by 200 points or more after declaring bankruptcy. Those who begin with lower credit scores may see drops of 120 to 150 points. 

A lower credit score will make it more difficult to get approved for credit cards and loans in the future. It’ll also mean higher interest rates on loans and cards that you are approved for. 

Chapter 7 bankruptcy (the most common type) also stays on your credit report for up to 10 years. That means the negative credit impact of bankruptcy can affect your finances for a long time. 

What does bankruptcy do to your credit if you opt for chapter 13 bankruptcy? You will still experience negative impacts, but they are generally less severe compared to chapter 7; chapter 13 bankruptcy stays on your credit report for seven years. 

Rebuilding your credit score post-bankruptcy

The negative mark of bankruptcy will stay on your credit report for 7 to 10 years, depending on the type of bankruptcy proceedings. But you can start taking steps today to improve your credit score. 

Keep up with payments. Not all types of debt will be discharged through bankruptcy. You may still have student loans or alimony payments, for example. It’s vital to stay on top of these payments and never miss a monthly installment. This will help rebuild positive credit history.

Consider applying for new credit. It may be difficult to get approved at first, but ultimately, you want to begin using credit again to show lenders that you can use it responsibly. You could apply for a small personal loan, a secured credit card or another type of credit that may be relatively easy to get approved for. 

Become a co-signer or authorized user. Having someone else cosign on a loan or rental agreement can help positively influence your credit score. Alternatively, if someone’s willing to make you an authorized user on their credit card, their positive payment history can benefit your credit rating. 

Keep your balances low. If you do get new credit cards or loans, try to keep your balances low. By keeping your credit utilization low (under 30% or so), you can positively impact your credit score. 

Monitor your credit. Finally, you’ll want to start monitoring your credit (if you’re not already). You can then track your progress, ensure everything is reported correctly and fix any credit reporting errors that pop up. To get started, you can sign up for a free credit monitoring service, such as Credit Sesame or Credit Karma. 

Rebuilding your budget after bankruptcy 

Bankruptcy can shift your monthly budget substantially. For one, it may eliminate or reduce certain monthly debt payments. 

It’s wise to start budgeting to take full advantage of your new financial situation. 

This starts with auditing your current spending. Are you aware of where your money is going each month? If not, you can track it using these techniques.  

Then, analyze your spending habits to see if they align with your goals and values. Are you spending a lot on optional purchases or services? Could you be saving more toward your goals? 

If you have extra money in your budget each month, what are you doing with it to optimize your financial situation? On the other hand, do you have a plan for what happens if you go over your monthly budget? The last thing you want to do is add more debt.

New to budgeting? Read through this guide on how to build a budget that lasts. 

Saving money post-bankruptcy 

Finally, you’ll want to consider exploring ways to build up your savings. This could be in the form of cash in a savings account, investments or a separate emergency fund. 

Saving money serves two purposes:

• It helps you move toward your financial goals

• It helps you avoid the possibility of a second bankruptcy by providing a financial cushion

There are many different ways to save money. For most people, making a budget is a great starting point. You could also embark on something like a six-month savings challenge, which could help provide motivation. 

Another option is to save money on interest by finding smarter solutions for managing existing debt. If you have credit card debt, Tally might be an option. Tally† helps qualifying applicants consolidate credit card balances into a lower interest line of credit. 

Whatever methods you use to save money, it’s wise to start a separate savings account. By keeping money separate from your main checking account, you may be less likely to accidentally spend it. You may wish to open a high-yield savings account, which will pay you a bit more in interest. 

Wrapping up

Now we know the answer to “What does bankruptcy do to your credit?” Bankruptcy can be difficult, but it also presents an opportunity for a fresh start. If you approach recovering from bankruptcy with an open mind and a desire to improve your finances, you can take consistent steps in the right direction. 

Rebuilding your credit score should be a top priority, followed by making a budget and starting to save money toward your goals. To learn more about personal finance, check out the rest of the Tally blog. 

†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. Based on your credit history, the APR (which is the same as your interest rate) will be between 7.90% - 29.99% per year. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 - $300.