Personal bankruptcy isn’t the end of the world, but it can hurt your credit score

Thousands of Americans file for bankruptcy every year. Filing for debt relief used to have a social stigma attached to it, but these days, a filing is so common that few people give it any thought anymore. That isn’t to say that people with debt problems should file for bankruptcy without giving it any thought, but at least someone with financial troubles won’t be shunned at parties anymore.

The reasons for filing can be many - job loss, illness, or just a run of bad luck. Fortunately for consumers, US law does permit people who can demonstrate that they simply cannot pay their bills the opportunity to have those debts forgiven in court. It’s not a cakewalk, however; the wiped out debts become taxable income. Worse, that bankruptcy filing will remain on your credit report for up to ten years. That can be a huge problem for anyone who wants to obtain a credit card or take out a home loan or mortgage anytime in the next ten years.

The situation isn’t all that bleak, however. There are companies that will extend credit to consumers who have just emerged from bankruptcy court. They don’t do so out of kindness; they know that once you emerge from court, you can’t file again for another eight years. That being the case, they know they will be paid. Your card will cost more than the average card, and you’ll have to pay higher interest rates, but you can get credit after bankruptcy.

Many lenders won’t want to do business with you right away, so your best advice is to take the expensive credit cards when they are offered and use them responsibly. Make regular purchases and pay the bill promptly when it arrives. Try to pay it in full, so that you don’t have to pay the outrageous interest rates that you will undoubtedly be charged. After a year or two, you should do two things that can help improve your credit score:

Ask for a higher limit. Your FICO score is based, in part, on the amount of purchasing power available to you. There is something called a debt-to-credit ratio. It’s a measure of how much you owe when compared to how much you can potentially owe. Ideally, you want to owe as little as possible when compared to your total available limit. The higher your limit, the more favorable your ratio. An increase in your limit can help that right away.

Get a major card. The big banks aren’t going to offer you anything right away; you’ll have to start with high interest accounts from small banks. When you can, you should apply for cards from larger providers, as they tend to carry more ‘weight” with the bureaus. An from Citibank can help your score more than an account from Bank on the Corner.

It’s tough recovering from bankruptcy, but it can be done. Reestablishing financial responsibility takes time and effort, but in time, you can do it. As doing so will save you a lot of money, you’ll be glad you did it.

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