Declaring personal bankruptcy is a nightmare everyone hopes to avoid. Coming back from it poses a challenge for those eager to re-establish a clean credit history.

There are two ways for an individual, or married couple, to declare bankruptcy – Chapter 7 and Chapter 13. The former wipes out all unsecured debts while the latter, available to those with a steady income, creates a plan, typically three to five years in length, during which some or all of the debts are to be re-paid. For more information, read File Chapter 7 Bankruptcy and The Other Personal Bankruptcy Option: Chapter 13.

What Happens to Your Credit

Declaring bankruptcy is a serious decision and one not to take lightly as your credit history – the combined credit score that allows you to borrow money for vehicles, education, a mortgage – will suffer. (See When To Declare Bankruptcy.) After bankruptcy, your credit score will drop and the interest rates offered to you by any future creditor will jump significantly.

The majority of bankruptcies are because of medical problems, even among those with healthcare coverage, explains Susan Tiffany, director of personal finance for adults at the Credit Union National Association (CUNA). Whether you've declared bankruptcy because of bad management or bad luck you'll have to prove you can come back from it. It's a stain you're going to carry around for up to 10 years on your record.

Re-building Your Credit

The good news? People think you can't get credit afterward, but you can, Tiffany says.

The bad news? You'll pay more for it because of your potential risk. You can borrow money, but you're going to pay a lot more for it.

1. Begin with a secured credit card. That should be your first step, advises author and credit expert Beverly Blair Harzog. One of the best ways to re-build credit is with one of these cards. I see this all the time. You have to put a deposit in the bank and those funds stay in the bank as a guarantee against the card. There's no stigma attached to it and there's nothing different about the card's appearance.

Typically, a secured credit card will allow you a limit of $500 to $5,000, she says. Use the card carefully, paying it on time every month, to prove you're able to handle it responsibly. Keep the balance low and pay it in full, she advises. The worst thing you can do, though, is to just pay the minimum because it means you're just back in debt again!

While members of the military can access lower-rate secured cards, others need to be very careful, she warns, as predatory lenders abound in this category; she offers a list of recommended secured credit cards on her website, beverlyharzog.com.

Harzog advises carefully timing when you pay bills with these cards, as it can take up to two weeks for the card company to process your payment.The APR you're charged can run as high as 29.9%. Read more at Secured Credit Cards.

2. Pay bills on time. Consistency in handling every form of credit after bankruptcy is key, says Susan Tiffany. You're establishing and demonstrating that you are responsible with this credit. She strongly suggests using automation and technology to make your bill paying easy. That way you don't get into bad habits, like late or missed payments.

3. Build up your savings. Establish a savings cushion to avoid using credit for cash flow and emergency savings. After a bankruptcy, I encourage people to beef up their savings. People feel so defeated that any progress is a good start.

4. Establish a personal relationship with a credit union. Tiffany suggests finding a staffer who can coach you and root for you, to steer you clear of some of these rocks.

5. Don't take on much credit. Even though some lenders will eagerly offer you new credit – precisely because you've already declared bankruptcy and can't do so again – hold off, Harzog advises. You're feeling pretty terrible at that point. You should really spend 12 to 18 months to get your feet back on the ground. Ideally, you'll create a long-term plan for the next three to five years.

6. Consider re-affirming some existing debts. After declaring bankruptcy, you can voluntarily choose to re-affirm (i.e. continue paying) existing debts, such as an auto loan. Any loan that is re-paid will help re-establish your credit sooner, says Mike McLain, senior assistant general counsel for compliance, regulatory affairs, at CUNA. Unlike new credit cards or loans, a prior loan can sometimes be continued at the prior, lower rate, he said. The balance or loan rate might even be lowered.

7. Think about taking out a credit-building loan. A lot of credit unions offer it," explains Harzog. "It's like an installment loan. When you feel that you could handle a small loan and pay it back quickly, this kind of loan can help you re-establish credit.

The greatest challenge in re-building one's credit, says Harzog, is simply being patient. With every passing year, your bankruptcy will have less impact on your credit score. It does get better! People feel so discouraged.

This will take time, agrees Tiffany. But as you're improving your situation, you can also be getting better interest rates as you go.

The Bottom Line

Repairing your credit history is possible. It takes time, consistent re-payment and careful attention to managing every current debt obligation. Beware of predatory lenders and high APRs from new offers of credit. For more information, read Credit Cards For People With Bad Credit.