Bankruptcy can feel like the end of the world – your financial life completely erased and starting over from scratch. However, it doesn’t have to stay that way forever. With some smart strategies and diligent effort, it is possible to rebuild your credit after bankruptcy and work towards having a clean credit report again.
How Bankruptcy Impacts Your Credit Reports
When you file for bankruptcy, it is reported on your credit reports for up to 10 years. There are two main types of consumer bankruptcy – Chapter 7 and Chapter 13.
Chapter 7 Bankruptcy
With a Chapter 7 bankruptcy, most or all of your existing debts are erased. However, it stays on your credit reports for 10 years from the filing date. During this time, it will have a severe negative impact on your credit scores.
Lenders view Chapter 7 bankruptcy as a high credit risk since it demonstrates inability or unwillingness to repay debt. For several years after, you will have difficulty getting approved for new lines of credit like credit cards or loans. Interest rates will also be very high if approved.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy, also called a repayment plan, does not eliminate debt but instead sets up a 3-5-year payment plan supervised by a bankruptcy court. If all payments are made on time, the remaining debts can be discharged.
A Chapter 13 bankruptcy remains on credit reports for seven years from the filing date. Though not quite as detrimental as Chapter 7, it still lowers credit scores significantly and is viewed unfavorably by lenders during the reporting period.
In both cases, bankruptcy prevents you from obtaining new credit easily as the reports reflect past inability to manage debt responsibility. However, there are steps you can take to rebuild credit within this difficult period.
Wait at Least Two Years Before Applying for New Credit
When you first file for bankruptcy, avoid applying for any new lines of credit like credit cards for at least two years. Credit reports and scores take time to recover, and early applications will likely be declined since bankruptcy is so recent.
During the first couple years post-bankruptcy, focus solely on paying existing bills and installment loans on time each month, if any were not included in the bankruptcy discharge. On-time payments are the surest way to prove improved financial responsibility to future creditors.
Apply for Secured Credit Cards
Around the two-year mark after bankruptcy, start rebuilding credit history with secured credit cards. These require a refundable security deposit in the amount of your credit limit, usually $200-$300. As long as the card is used responsibly, the deposit is returned after a period of on-time payments (often 6-12 months).
Secured credit cards provide many of the same features as unsecured ones but with lower credit limits. Use the card for a small recurring expense like a streaming service and pay the full statement balance each month before the due date. This establishes a positive payment history, which reports to credit bureaus.
In 9-18 months once secured cards demonstrate responsible use, you can apply for entry-level unsecured credit cards with low credit limits. Continue conscientious payment practices with all cards.
Maintain Low Credit Utilization
Credit utilization, the portion of your credit limits used each month, is a major factor affecting scores. Keep the credit utilization rate very low by using no more than 30% of available credit on each account. Less than 10% usage is even better if possible. Pay down balances before statement closing dates.
Add an Authorized User
Consider becoming an authorized user on an established credit card account of someone you trust, like a spouse or parent. This “piggybacks” their positive credit history onto your reports. Pick a card with on-time payments, credit limits exceeding your income, and low utilization. Building dual credit histories can accelerate rebuilding after bankruptcy.
Maintain an Outstanding Payment Record
The single most important factor for recovering from bankruptcy and bad credit is an unblemished payment history. Lenders need to see at least a year or two without any late, missed, or delinquent payments. An untarnished record demonstrates renewed financial responsibility essential to regaining creditworthiness.
Automate card or loan payments through bank transfers to ensure never forgetting due dates. Credit reports will reflect positive history each month. If a temporary financial setback occurs, contact creditors proactively to ask about hardship programs.
Check Reports and Scores Regularly
Under the Fair Credit Reporting Act, you can obtain one free credit report per year from each of the three major credit bureaus – Equifax, Experian, and TransUnion. Stagger requests every 4 months to monitor your file regularly. Carefully review all account information for accuracy, including account status and payment histories.
You also have the right to dispute and remove any errors you notice. Inaccurate negative data drags scores down unfairly, so correct issues are reported in error through credit bureau dispute processes.
Additionally, FICO credit scores should be checked approximately every 3-6 months. Different scoring models calculate various factors differently, so they track individual progress over time. Monitoring also alerts you early if identity theft or fraud occurs on accounts.
Consider Credit-Builder Loans
For those unable to qualify for secured credit cards due to sparse credit history coming out of bankruptcy, credit-building term loans may be a better starting point. These installment loans function like secured credit cards in establishing positive payment records.
Credit-builder loans are offered through non-profit credit counseling agencies. Borrow a small amount, make monthly payments on time, and the loan is reported to bureaus to bolster thin files. Interest rates are reasonable. Successfully completing the loan demonstrates responsible behavior that lenders appreciate.
Ask for Credit Limit Increases Strategically
Once secured cards or entry-level unsecured cards have been utilized responsibly for a solid 9-12 months, call issuers for modest credit limit increases. This expands available credit without taking on more debt. More open lines in good standing, combined with continued on-time payments over time, raise scores further. Only request raises sparingly every six months at most.
Join an Authorized User Program
For those struggling to pass secured card application thresholds due to very low or no income, authorized user programs facilitated by reputable non-profit credit counseling agencies provide a helpful temporary step. These match individuals rebuilding after financial setbacks with responsible mentors already established with several credit cards. Becoming an authorized user on those cards adds positive data to reports. Participation must adhere to program requirements for the benefit to last. Used judiciously with other tactics, it aids the rebuilding process.
Consider a Co-Signer Short-Term
Co-signing allows joint responsibility on a new loan or credit line for someone unable to qualify independently due to poor credit. A co-signer with excellent credit “co-signs” your application in order to boost chances of approval. Make absolutely certain to make on-time payments, as late or missed ones negatively impact both credit histories. Do not rely on a co-signer for long – the goal is to qualify on your own within a year or two as scores improve.
Do Not Close Bankruptcy Too Soon
It may feel great to finish out bankruptcy before the scheduled discharge but do not request early closure. Credit reports prefer to see bankruptcies run their full term as agreed in court filings. Closing early could inadvertently imply an inability to complete financial obligations or that circumstances have not fully stabilized. Let bankruptcies close naturally on the recorded discharge dates.
Avoid Further Credit Problems
Getting wrapped up in additional credit issues like judgments, tax liens, or new collection accounts adds insult to injury as you rebuild after bankruptcy. Keep current on all bills, payment arrangements, and taxes. Solve financial problems through debt management instead of ignoring them and letting collectors sue. New issues reported to credit bureaus can stall or even regression your recovery efforts.
Consider Student Loan Assistance Programs
For those weighed down by student debt obligations that precipitated bankruptcy filing, look into income-driven repayment plans or loan forgiveness programs for student loans if eligible. Reducing or eliminating education debt burdens takes the pressure off monthly budgets, freeing funds to focus on credit accounts as reports recover year after year. Contact loan servicers about options.
Ask Lenders About Hardship Programs
During periods of high financial stress, renegotiating loans or temporarily lowering payments due to hardship may benefit your payment status and credit reports. Lenders usually understand life events like job loss, medical issues, or temporary overextension occasionally impact customers. Reach out proactively to explain challenges and explore assisted programs to avoid delinquencies.
Build an Emergency Fund
Having cash on hand prevents relying on credit cards or loans for unexpected expenses that could then derail careful payment records. Even setting aside a few hundred dollars each month provides comfort should vehicle repairs, medical costs, or other life events arise. Building a fully-funded emergency fund of a few thousand dollars takes pressure off the rebuilding process.
Allow Full Bankruptcy Completion Before Applying for Major Loans
While you may feel ready, avoid applying for major loans or mortgages until the bankruptcy has been fully discharged and completely falls off your credit reports. Lenders are unlikely to approve big-ticket items like auto loans or home financing with bankruptcy history still visible. Stay patient and give the maximum allotted time for the bankruptcy to age appropriately. Around the two-year post-discharge mark, you’ll be in a better position to qualify for the larger dollar amount of credit that will further boost your credit-rebuilding progress. But waiting the full term fosters the cleanest reports possible moving forward.
Work with Non-Profit Credit Counselors
Non-profit credit counseling agencies can offer guidance tailored to your specific situation. From discussing options early in the bankruptcy process to creating customized rebuilding plans post-discharge, counselors understand both legal procedures and credit repair strategies. They know common errors to avoid as well as legitimate programs accessible to those recovering from financial setbacks like student loan assistance. Counseling provides accountability and ensures maximizing positive actions at each stage. Many agencies also directly facilitate credit-building products and programs, as discussed earlier.
Hire a Licensed Credit Repair Company (If Needed)
For those with extremely challenging credit issues due to multiple bankruptcies, foreclosures, tax liens, or other severe negative items, professional credit repair may expedite rebuilding by disputing and removing inaccurate or obsolete data from reports. However, beware of unscrupulous companies making unrealistic claims or charging upfront fees, which are against the law. Do thorough research and only hire reputable services licensed in your state that charge reasonable success-based fees. Credit repair specialists understand laws and processes better than most individuals. They submit high-volume disputes with detailed documentation on your behalf to bureaus and creditors for maximum impact. Just be sure timeline expectations remain realistic.
Maintain Patience and Persistence
Rebuilding credit after bankruptcy requires time and consistent effort. Resist the temptation to give up if progress feels slow. Staying dedicated to positive financial habits, avoiding new credit issues, monitoring reports, and gradually expanding available credit through secured options and on-time payments will pay off. Where others see bankruptcy as a lifelong stigma, you can view it as the beginning of a fresh start by learning from past mistakes. With patience and persistence, clean credit reports are absolutely within reach again.