If you’ve made the difficult decision to declare yourself bankrupt, you’re probably breathing a big sigh of relief at having the weight lifted off your shoulders. Once this passes though, you’ll probably be wondering what life will be like now that you’ve taken the plunge, and how you can rebuild your credit situation again.

Your credit report

As well as looking bad, this lowers your credit score and makes it harder for you to obtain credit in the future. If you do decide to take the plunge, make sure you check your credit report afterwards as it may contain some mistakes that have an impact on your credit score. You may find that debts that were wiped out by the bankruptcy are still showing as being ‘unpaid’ or ‘overdue’ (rather than ‘included in bankruptcy’) .

Your credit situation

After you’ve gone through the bankruptcy process, your credit score will likely be in tatters. The good news is that this need not last as long as you think, as you can start to rebuild your credit score again. As long as you’re sensible and don’t live well beyond your means, you can rebuild your credit rating in a matter of years.

You can do this in several ways:

• Starting to use credit again. It might sound like a bad idea considering the fact that credit debts were probably at least part of the reason why you declared yourself bankrupt in the first place, but rebuilding your credit history can depend on using credit again. The key this time around is to use it sensibly, stick to 30 per cent or less of your available credit limit(s) and not getting behind on your repayments.
• Applying for a secured credit card. The available credit limit on a secured credit card is typically somewhere between $200 and $500, which might seem like it’s not worth bothering with – especially as you should be sticking to 30 per cent or less of the available credit limit. After bankruptcy, this is likely to be the only type of credit card that you will be accepted for – in the short-term, at least. To cover themselves, lenders will require the card to be linked to a specific bank account that is set up at the time of application (this is the ‘secured’ part) so that they can take repayments out of the money that you deposit into this if you miss repayments. The credit limit usually depends on how much is deposited into the account. The big benefit of having a secured credit card with a low available balance is that it makes it easier to pay off the balance in full each month, which will help to show prospective lenders that you’re committed to using credit sensibly and make regular repayments.
• Choose the right type of secured credit card. Not all secured credit cards are equal, so make sure that you pick the right one. Look for one that reports to the three major credit reporting agencies – Experian, Equifax and TransUnion – so that having it will help your credit score, and make sure that there are no upfront or annual fees to pay as these can be high. The best secured credit cards will convert to an unsecured credit card after using it for one to two years provided that you meet your repayments.
• Paying existing debts. While bankruptcy may have wiped out all of your debts, you may still have some debts left to pay off. If nothing else, you may have student loans still to pay off. Overpaying any remaining debts (including the repayments on your student loan) will help to improve your credit score.

Begin the rebuilding process

In the early days (or years) after bankruptcy, secured credit is likely to be your only option as lenders want a guarantee that they can get their money back. To put it bluntly, your track record with debts won’t inspire them to lend you unsecured credit – unless you can prove further down the line that you’re now a responsible credit user. When you come to look for an unsecured credit card, what should be on your checklist?

• Low(ish) interest. This isn’t as crucial as it would have been pre-bankruptcy, as you’ve hopefully become the type of credit user who makes a habit of paying off balances in full every month to improve your credit score. Even so, you don’t want to be stuck with a high interest card, just in case you happen to only partially pay a balance one month. Assuming that you’ve managed to up your credit score, you’ll hopefully find that the cards with ‘lower’ interests become available to you (and by ‘lower’, I mean ones that aren’t the daylight robbery of 25% or above). The high interest rates tend to be attached to unsecured cards more than secured cards.
• No application or annual fees. Post-bankruptcy, you may find yourself being offered credit cards and bank accounts that have application fees attached to them. Avoid these like the plague, as you don’t need to be tied into them just because you’ve been bankrupt.

Declaring Bankruptcy is a pretty serious call, and shouldn’t be a decision you take lightly. It’s likely to pretty much destroy your credit rating for the foreseeable future. Having said that, bankruptcy should not be seen as the end, but rather a chance for a new beginning. With patience and a bit of discipline you can rebuild your financial situation in a relatively short period of time.

Photo by Daniel Y Go

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1. A Primer: Secured Credit Cards
2. Bankruptcy: Chapter 7 Part II
3. Banks seize homes over credit card debt
4. How Limits Are Determined
5. Minimum repayments = Maximum Pain!