How I'm Rebuilding My Credit After Bankruptcy

Tracy M. (he asked we not share his full name) is rebuilding his credit for the second time. It’s a long haul but despite numerous obstacles — including six-figure student loan debt that has tripled due to fees and interest — he’s not giving up.

His experience with credit started in college when a furniture store offered his a credit line of about $1,800, which he says he maxed out with his first purchase. He made his payments on time, and when he paid the balance off, he was inundated with offers for credit cards. He accepted those he thought had reasonable interest rates (between 9% and 14% at the time).

When he relocated to the West Coast to go to graduate school full time, he says he basically lived on those cards and student loan disbursements, and graduated “swimming in debt,” he said. “In the beginning you think to yourself, ‘The money I’ll make when I graduate will be plenty to pay the student loan’.” But not long after he left school he had about $40,000 in credit card debt and his student loan debt totaled in the neighborhood of $120,000.

While he was able to get a good job at what seemed like good money at the time, it was not enough. “I was making enough to pay my living expenses and buy myself a pack of gum,” he laughs. The minimum payments on his student loans were around $700 to $800 a month. Unable to afford that, he deferred his student loans and concentrated on trying to pay off the credit cards, but eventually the juggling became too much.

In 2003, Tracy filed for bankruptcy. His credit scores “tanked,” dropping to “somewhere in the 400s” he says. (Learn what a bad credit score is here.)

Bankruptcy gave him some breathing room but he still wasn’t rolling in dough. He says he lived very frugally and continued to try to catch up on his student loan payments (which could not be discharged), but it was impossible. He has since married and become a father. “There have been many times when we have been flat-out broke. We live very cheaply and we don’t live above our means,” Tracy says.

Still, after a few years of making car and house payments on time, his credit started to recover. His scores were back into the high 500s and the real estate market was heating up. In an attempt to make money so he could put his debt behind him, he sold his home and bought four: three rental properties and one to live in. All was fine until the real estate crash, which forced him to unload all the properties — selling at a loss and even going through foreclosure. Again his credit dropped into the low 400s and he has been working on it ever since.

Lessons Learned

Despite the fact that he may never be able to fully repay his student loans and is the sole provider for his family (his wife is disabled), Tracy sounded remarkably upbeat when I spoke with him. He reached out to Credit.com when we asked our members to share their success stories, telling us that he’d be happy to share his experience if it helps someone else.

His words of advice?

“Student loan debt is forever,” he warns. While borrowers may postpone payments through forbearance, eventually the loan will have to be repaid. “You really are signing away your rights — a lot of people don’t realize that. You’ll never get away from it.” He’s now making income-sensitive payments which are affordable but will never pay the loans off. (In fact, student loans can prevent you from getting a mortgage or even a credit card. Here’s how.) In his case, his deferments and repayment problems meant his balances mushroomed, and he now owes more than $360,000 on an original balance that was one-third of that amount. At one point a $60,000 collection fee was added to his balance. “How is that even legal?” he wonders.

Starting over can be tough. He felt as if no creditor would touch him for the first five years after his bankruptcy, which meant he had to pay cash and turn to alternatives such as prepaid cards.

But you can get a fresh start. Tracy started rebuilding his credit with a car loan. The interest rate was very high — around 20% — but it was the first loan he could get after his discharge. And it was a start. “Once I started making on-time payments on the car loan, my score jumped about 35 points,” he says. (Another option for those who have been through bankruptcy or other credit problems is a secured card, which is available to most consumers with bad credit.)

Understand your credit. Tracy knows that there is a difference between a credit report and a credit score, and he monitors both. He also says he scrutinizes every detail in his credit. “I learned by reading the Credit.com blog and other online sources,” he notes. One way consumers can monitor their progress is by getting two free credit scores, updated every 14 days, along with an action plan for their credit at Credit.com.

You can repair your own credit. “I discovered that I could dispute some of the negative reporting on my credit report,” says Tracy. “The easiest way is to use the Equifax online dispute tool. Some of the disputes worked and the negative reporting removed but some did not work and the negative reporting stayed on my report. This process is truly a crapshoot in my opinion. The ones that were removed for me were most likely because the creditor couldn’t validate the debt, but others remained even when I presented documents to prove I paid the debt. This process is far from perfect but it did get some of my negative reporting removed.” (Here’s a step-by-step guide to disputing information on your credit reports.)

Watch the drop-off dates. Tracy very carefully monitors the drop-off dates on his credit reports and uses them to help make decisions about what to do about some of his accounts. In particular he looks for the date that an item is estimated to come off the report. “What this does for me is shows me whether I should wait for the debt to fall off if it is soon (within 6 months) or possibly consider negotiating a payoff amount if the debt is small enough. For example, a debt of $800 can be negotiated to a payoff amount of $250 or less depending on how much leeway the collection agency has to negotiate.”

Start small. He now has an unsecured card with a credit limit of $200. “Even though the limit is tiny, if I can show usage and good payment history my score will continue to go up and I will look more attractive in the eyes of other potential creditors because another creditor has trusted me.”

His credit scores are now back in the 500s and rising. He still has a long way to go, but he’s plugging away. “When you have people counting on you, you have to do what you have to do,” he says, reiterating that he hopes others can learn from what he’s been through.