Filing for bankruptcy used to be a pretty clever and painless way to stick it to your credit card company. Back then, if you were really up a creek you could file for Chapter 7 and get a “fresh start.” Effectively, all your assets would be liquidated and given to creditors, and all your remaining debts would be nullified, so your credit card, mortgage, and student loan debt would basically just disappear and you would start over with a clean slate. Those days ended in 2005 with the Bankruptcy Abuse Prevention and Consumer Protection Act.
This law, quite simply, tries to make filing for bankruptcy a royal pain in the backside, in order to prevent abuse from those who would repeatedly run up debts and then file. New requirements for a bankruptcy filing include mandatory credit counseling classes, a “means test” to make sure you really need to file, audits, an eight year moratorium on future filings, and significantly higher filing fees. If you fail to meet any of these qualifications, you have to file for Chapter 13 instead, which means establishing a payment plan with your creditors of up to five years, so your debts still stand and you’re still left holding the bag. (Editors Note: See our post on the different types of bankruptcy)
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How do I rebuild credit after bankruptcy?
Secured credit cards are often the best choice for people who are looking to rebuild their credit history after you file for Chapter 7 (total wipeout) or Chapter 13 (payment plan). The way these generally work is that you post collateral upfront equal to the amount of the credit line you want, normally in the ballpark of $500-$3,000. The card issuer then holds this as collateral in case something happens and you can’t pay your bill. It’s not used to cover your balance each month, however, so if you fail to pay back what you spend each month, you still incur interest on any remaining balance, despite the collateral.
We recommend you stick with a secured credit card from your local bank or credit union, instead of going with one you find on the internet. Your local bank may offer you much lower fees, and usually offers the ability to parlay the card into an unsecured credit card after a year of good behavior. However, we recognize that this isn’t an option for everyone. There are both secured credit cards and prepaid debit cards to help you get started on the path to rebuilding your credit.
This a guest post by Melissa Mansur who is a member of the NerdWallet team, helping to dig up the dirt on the credit card industry, and is also an MBA candidate at Stanford University's Graduate School of Business. Prior to graduate school, Melissa was a venture capital investment associate at DCM and an investment banking analyst with Credit Suisse's technology group. She is a graduate of Stanford University, where she has degrees in Electrical Engineering and Economics. Nerdwallet is not affiliated with or endorsed with LPL Financial.