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Bankruptcy & Your Credit

by on 10/25/2013

Often clients put off filing bankruptcy, because they are concerned about the effect it will have on their credit. Even when they have fallen behind on their bills (causing 30-60 day late notices on their credit report) or even when some creditors have sold their account to collection agencies (further negatively impacting their credit score), they still look at bankruptcy as this nuclear bomb that will demolish their credit forever. Fortunately, that is not the case. In fact, in many situations the filing of the bankruptcy results in an immediate improvement in credit. After your bankruptcy, your discharged debt is gone, and you have a clean slate to start rebuilding your credit.

So many clients have told me they will never use credit cards again. I think that is always a big mistake. In fact, you will never build your credit score without obtaining and using new credit.

After a bankruptcy, you want to go out right away and obtain two credit cards. I suggest to my clients to go to, and compare the different cards available. Don’t be too concerned about interest rate; simply try to get the ones with no or at least the lowest monthly/annual fees. The cards you get now you will want to keep forever, since the longer you have them the more they will help your credit score. Now here is the key: use them only for items on your monthly budget -- items you would be paying cash for anyway. This includes items such as gas, food, and utilities. Then pay them off with each bill. Don’t use them for gifts or travel, unless you already have the funds for those items saved up.

Items like auto loans and home loans will also help build your credit, but do not underestimate the strength your revolving accounts will provide.

One note regarding department store cards: these are the lowest on the totem pole of benefit to your score.