Five Post-Bankruptcy Myths

The decision to file for bankruptcy is typically a last resort for consumers who find themselves plagued with debt. While bankruptcy may offer a fresh start and relief from bills incurred from divorce, unemployment and uninsured medical costs, many consumers worry about how the decision will ultimately impact their financial future.

"Most people who contemplate bankruptcy fear they will never again own a credit card or be able to buy a home or get a new car or even take a vacation," says Paula Langguth Ryan, author of "Bouncing Back from Bankruptcy." "There are a lot of misconceptions about obtaining credit after bankruptcy."

If you have filed for bankruptcy and are wondering whether you should apply for credit, and how to go about rebuilding your credit score, you aren't alone. A report from the Automated Access to Court Electronic Records released in June found that consumer and commercial bankruptcy filings are on pace to reach 1.5 million in 2009.

Ryan, who once filed for bankruptcy, now counsels others on how to achieve financial freedom and avoid feeling overextended. She says some of the most common misconceptions about obtaining credit after bankruptcy include:

1. Filing for bankruptcy will permanently ruin my credit.
Many people actually obtain a higher credit score in the years following a bankruptcy if they successfully change their spending habits.

As you work to re-establish yourself as a good credit risk, Ryan recommends making sure your credit reports are accurate. To get a free copy of your credit report, visit The three major credit bureaus are Equifax, Experian and TransUnion.

"Under a new federal law, consumers are entitled to receive free copies of their credit reports from all credit bureaus every 12 months," Ryan says. "All three reports can be ordered via telephone by calling (877) 322-8228. You also don't need to order all three reports at once, by staggering your requests, you can order one from each credit reporting agency every four months."

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When you receive your credit reports, Ryan recommends checking for common post-bankruptcy errors, including debts that are listed more than once and closed accounts that are still listed as open.

2. I won't qualify for credit for at least 10 years.
"While the bankruptcy will appear on your credit report for 10 years, you will be able to obtain credit sooner if you choose to do so," Ryan says. "In fact, many people are inundated with credit card offers after they file for bankruptcy, although typically the interest rates are higher.

If you decide to get a credit card, Ryan suggests obtaining a secured credit card that reports your credit history, but doesn't report the card as secured. "Since your goal is to re-establish credit, you want a card that reports your payment history each month to at least the three major credit bureaus," Ryan says. "When you're ready to take out a car loan or mortgage you want your good payment history to shine through."

Ryan recommends looking for secured cards that have no application fee, have a 25-day grace period, and ones that report to the major credit bureaus, but don't report that the cards are secured.

3. If I get a credit card, I risk having my debt get out of control again.
"Only charge what you can pay off each month," says Ryan. "Start off with a $200 to $500 line of credit to see what you can realistically afford."

Ryan also recommends paying off your credit card bill as soon as it arrives to avoid getting a post-bankruptcy black mark on your credit report that tells creditors that you are still a bad credit risk.

4. Most employers run credit checks on potential employees. When they see a bankruptcy on my credit report, I won't get hired.
"You will have advance notice that an employer is looking at your credit report because by law they can't pull your credit report unless you've signed a release giving them permission to do so," Ryan says. "One bankruptcy will not disqualify you as a candidate at most companies. If you think the job is coming down to you and another person, I recommend being upfront about your past bankruptcy."

5. If I file for bankruptcy I'll never qualify to buy a car or a home.
Melissa Sage of Houston had always maintained a good credit rating and worried about the negative effects bankruptcy would have on her credit after she lost her job and filed in 2006.

"Several months after filing, I obtained a card with a low credit limit and started making small charges and paying my card off each month," Sage says. "My credit score bounced back almost immediately and now floats around 700. I recently bought a car and was able to get a good interest rate on my loan."

Kirk Steinbruecker of Chicago filed for bankruptcy in 1999 after a divorce left him deep in debt.

"I was determined not to file for bankruptcy again, so I made small purchases and paid off my credit cards every month," he says. "I slowly rebuilt my credit history, and I purchased a townhome in 2004 and an investment condo two years later. My credit score is now 805, which is even higher than it was before."