A bankruptcy filing stays on your credit record for up to 10 years, but the road to financial recovery needn’t take that long. The trick to achieving financial health is to confront the problem, rather than hide from it.
Examine your attitude.
The first and most important step in regaining financial soundness is to create a new attitude about money and credit. Do you know why you got into debt? Are you a shopaholic? Are you a compulsive gambler? Whatever the reason, understanding how you got into trouble in the first place will help you identify the changes you need to make to prevent it from reoccurring.
Prepare a budget.
The next step requires that you take a long hard look at your income and expenses. Draw up a budget for all your basic expenses: rent or mortgage payments, utility and household bills, transportation costs, work-related expenditures, daycare, and recreation fees.
To keep track of where your cash goes, for at least a few months try writing down all the cash you spend from your morning coffee to a weekend movie. At the end of each month, compare your total expenses with your income. If your spending outpaces your earnings, you’ll need to make some cuts or find a way to earn more money.
If you need assistance in putting together a budget you can live with, you might want to contact the Credit Counseling Centers, Inc. (1-800-547-5005), a nonprofit agency that provides free counseling and low-cost debt management programs to people experiencing financial difficulties.
Establish an emergency fund.
Part of your budget should include a provision for building an emergency fund equal to roughly a year’s worth of living expenses. An emergency fund provides a financial cushion in the event a job loss or illness affects your earning capability and will help you avoid falling into debt again in the future.
Check your credit report.
Because credit reports sometimes contain mistakes, it is a good idea to review your credit file thoroughly to make certain that the information it contains is accurate and complete and any adverse information more than seven years old is deleted. Unfortunately, a bankruptcy can remain on your record for as long as 10 years.
If you find errors, you can use the directions that come with your report to request that the credit agency investigate your claim. If, after doing so, the credit bureau validates your claim, or the creditor who provided the information can no longer verify it, the credit bureau is required to delete the information from your file.
If you’re not satisfied with the outcome of the credit bureau’s investigation, you can contact the creditor directly to try to resolve the problem. Should you want to explain a particular entry in your file or tell why you believe certain information is incorrect, you can prepare a 100-word statement that the credit bureau must provide to anyone who requests your report.
Avoid "credit repair" companies that claim they can correct your credit rating, or obtain for you a credit card or loan. The reality is that they can’t do anything that you can’t do on your own, and you’ll end up paying a hefty fee for their unnecessary services.
Once you’re satisfied that the information in your credit report is accurate, you’ll want to start working at getting positive information on file. The best way to do so is by showing that you can use credit responsibly. Most likely, you’ll need to start with a secured credit card backed by money you will be asked to deposit.
You’ll be issued a card with a credit limit equal to the amount you’ve deposited. To build your credit history, it’s a good idea to use your card every month, but only if you’re sure you’ll be able to pay the balance due on time. After you’ve demonstrated your ability to handle your credit card responsibly for a year or two, some issuers will convert your secured credit card to an unsecured card.
Passbook loans, which are secured by a savings account or certificate of deposit, provide another means of building credit. Not all financial institutions offer passbook loans, but when you find one that does, timely payments will reflect favorably on your credit history.
After years of working at a steady job, rebuilding your credit, and demonstrating that you can handle your personal finances and credit, you may be able to qualify for a mortgage or car loan. However, you may be asked to make a larger-than-normal down payment or be charged an above-market interest rate. Be patient with the rebuilding process. Chances are, it took years to get into trouble, and it’s likely to take years of living within your means to refurbish your credit history.