Key takeaways
- Bankruptcy significantly impacts credit scores, limiting access to loans and credit cards.
- Rebuilding credit takes time and effort but can be achieved through proactive measures and monitoring.
- Rebuilding credit includes making timely payments, checking credit reports and applying for new credit lines with discernment.
- Improving overall finances involves building an emergency fund, sticking to a budget and breaking bad credit habits.
In January 2024, United States Courts reported that bankruptcy filings rose for the fourth quarter in a row after more than 10 years of decline. The spike suggests that financial pressures and economic challenges are increasing, leading more people to seek bankruptcy relief.
While it’s an ethical way for many people to get a fresh start, filing for bankruptcy can significantly negatively impact your credit score. No matter the reason, a bankruptcy on your credit report indicates that you couldn’t pay off your debt as agreed, making it difficult to obtain loans and credit cards at competitive rates.
However, rebuilding your credit is possible with patience and responsible financial habits. You can learn the essential steps to restore your credit after bankruptcy and secure your financial future.
How bankruptcy affects your credit
Bankruptcy is important to maintaining the integrity and functionality of the economy, and it has saved many people from financial disasters. Sadly, it’s not so nice to your credit.
When you file for bankruptcy, it becomes a public record and is also recorded on your credit report, which can drastically lower your credit score.
A bankruptcy filing can remain on your credit report for years, depending on the type:
- A Chapter 7 bankruptcy stays on your report for 10 years.
- A Chapter 13 bankruptcy remains for seven years.
During this time, your credit options will probably be limited. Any credit you obtain will likely come with higher interest rates. Moreover, bankruptcy can make it harder to rent an apartment, get a mortgage or even find a job, as many landlords and employers check credit reports.
Overall, bankruptcy signals to lenders that you are a high-risk borrower, and this nearly always harms your credit.
Steps to rebuild your credit after bankruptcy
Your score is immediately impacted once a bankruptcy filing hits your credit report. If you don’t want to wait seven to 10 years to apply for financing or take out loans with outrageous interest, it’s time to take proactive measures.
Here’s what you can do to rebuild your credit and get better rates on loans and credit lines — sooner rather than later.
1. Keep up with payments on existing loans and credit cards
If you still have debts after filing for bankruptcy, now is not the time to ignore them. A derogatory mark on your report doesn’t mean you’re doomed. However, you do need to stay on top of your current obligations and focus on making timely payments on any remaining loans or credit cards.
Your payment history makes up 35 percent of your FICO score, so consistent, on-time payments can help rebuild your credit. Set up reminders or use autopay to ensure you don’t miss any payments.
2. Check your credit reports and consider credit monitoring
You’re typically entitled to one free credit report per year from each major credit bureau: Equifax, Experian and TransUnion. Currently. you can access each of your reports once a week for free from AnnualCreditReport.com. After bankruptcy is a good time to review your reports for accuracy.
If you find errors or inaccuracies, dispute any incorrect information. In some cases, you may even be able to remove old debt from your report. Accurate reports can help improve your credit score over time.
Monitoring your credit report post-bankruptcy allows you to track any inaccuracies or errors that may arise. This ensures your credit information is correct and up to date. It also enables you to observe your progress in rebuilding your credit and promptly address any issues that might arise.
3. Apply for a new line of credit
Adding a new line of credit and making on-time payments can boost your credit score. This can establish a good payment history and increase your total credit limit. A higher credit limit can positively impact your score in some cases.
However, be cautious about hard inquiries. Each time you apply for a line of credit, it could cause your score to go down a few points. Hard inquiries can stay on your credit report for up to two years.
Consider applying for one of the following:
The fees with low-credit financing might be high. If you have an annual fee or excessive interest rate, you might consider closing the account later after you’ve had a chance to build your score. Remember that closing accounts can impact your credit score by reducing your credit age and utilization.
4. Become an authorized user on someone else’s account
Becoming an authorized user on someone else’s credit card is a good way to build credit. By using the primary cardholder’s payment history, you can help establish your credit profile. As an authorized user, you get a card with your name linked to their account. While you can make purchases, the primary cardholder is responsible for payments.
This can positively impact your credit report and score, although it has some risks. Fortunately, this process doesn’t usually involve a hard pull on your credit. So, it won’t hurt your credit score unless the original account holder is irresponsible or you spend more than the account holder can help with.
5. Apply for a loan with a co-signer
A well-qualified co-signer can improve your chances of getting approved for a loan. Lenders consider the co-signer’s credit score, which can help secure better terms. This can be especially helpful if you need to buy a car or make another major purchase.
You may be able to find a co-signer by asking a trusted family member or close friend with a strong credit history. It needs to be someone willing to take on the responsibility of your loan. Ensure they understand the commitment involved with co-signing, as they will be equally responsible for the debt if you cannot make payments. So, make sure to make timely payments to protect their credit.
Keep in mind that a co-signer is not the same as a co-borrower.
6. Be cautious about job-hopping
Stable employment can positively affect your loan approval chances. Lenders look for consistent income to ensure you can repay your loans. Frequent job changes or gaps in employment can make you appear riskier to lenders.
If you do switch jobs, try to move seamlessly from one to the next. This will keep the gap closed and show lenders that you’re dependable.
7. Hire a credit repair professional
If you need a little help, credit repair professionals may be able to help. After bankruptcy, credit repair specialists, credit counselors, specialized attorneys or financial advisors can offer personalized strategies to improve your creditworthiness.
Credit repair companies and professionals can:
- Review your credit report for inaccuracies
- Dispute errors
- Provide guidance on rebuilding your credit
They might also negotiate with creditors, provide budgeting advice or recommend credit-building products like secured credit cards to help you rebuild credit post-bankruptcy. However, they can’t remove legitimate negative items from your credit reports. You also need to know how to spot debt relief and credit repair scams.
How to improve your finances after bankruptcy
In addition to rebuilding your credit, it’s a good idea to tackle any financial habits that put you in a position to file for bankruptcy in the first place. It’s a good idea to build an emergency fund, stick to a budget and be mindful of your credit habits as you move forward.
Build an emergency fund
With much of your debt eliminated, it’s an ideal time to start saving. An emergency fund is critical for providing financial security. It can also prevent you from relying on credit in the future.
Aim to save three to six months’ worth of living expenses. Increase savings gradually and use unexpected windfalls to boost your fund. Keep your emergency fund separate and easily accessible in a high-yield savings account for a solid financial safety net.
Stick to a budget
With the new freedom you’ve gained from bankruptcy, a new and improved budget might help you get your finances back on track.
To create a monthly budget, calculate your income and track your spending for a month or two to understand your financial habits. Then, prioritize your expenses based on your financial goals and design your budget accordingly, allocating money for needs, wants and savings.
Use tools like budgeting apps or templates to streamline the process. Regularly review and adjust your budget as needed to stay on track with your financial objectives. This proactive approach will help you manage your finances more easily.
Break any bad credit habits
Breaking certain bad habits is crucial to making the most of your credit cards and avoiding damaging your financial health.
Here are some bad credit habits to avoid:
- Buying more than you can afford
- Closing your oldest credit card accounts
- Making late payments
- Not repaying before a 0 percent APR offer ends
- Paying only the minimum due
- Perpetually transferring debt to new balance transfer cards
- Taking out cash advances
- Using the wrong credit card
By breaking these habits and managing your credit cards responsibly, you can make the most of the benefits without falling into financial pitfalls.
The bottom line
Bankruptcy can be a financial reset, but it can also damage your credit score. By making timely payments, responsibly using new lines of credit and maintaining stable employment, you can rebuild your credit over time. To do this, you should regularly monitor your credit reports, avoid credit repair scams and focus on building a solid financial foundation.
Frequently asked questions
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Bankruptcy remains on your credit report for 10 years. However, you might see improvements in your credit score within one to two years by reducing your debt-to-income ratio and making timely payments.
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Rebuilding credit after Chapter 13 takes longer, typically three to five years, as you follow a strict repayment plan. Regular, timely payments and responsible financial behavior can help improve your score during this period.
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