Rebuilding Credit After Bankruptcy

Tara Seboldt
Apr 22, 2022

Did you know nearly 400,000 nonbusiness bankruptcies were filed in 2021? If you’re one of the many people considering bankruptcy as your final option to get out of debt, you probably have questions.

How does bankruptcy affect your credit score? Will lenders ever give you a loan again? How can you fix your credit after filing bankruptcy?

Let’s explore how bankruptcy affects your credit history and how to start rebuilding credit after bankruptcy.

Is Rebuilding Credit After Bankruptcy Possible?

Yes, you can rebuild your credit score after filing bankruptcy. Even with a bankruptcy on file, you have options to help improve your credit.

However, you may find it harder to get approved for a loan if your bankruptcy record is still on your credit report.

Typically, bankruptcy is reported on your credit report between 7-10 years, depending on what kind of bankruptcy you filed for.

It’s a good idea to consider "bad credit" options when rebuilding credit after bankruptcy.

Rebuilding Your Credit? We Can Help.

How Long Can Building Credit After Bankruptcy Take?

You can expect your credit score to take a significant drop after filing bankruptcy.

Rebuilding it, on the other hand, is a much slower process.

It may take years to bring your credit score back to where it was before filing.

On the plus side, you’ll likely see improvements in as little as a few months if you practice good credit habits.

How Does Type of Bankruptcy Affect Credit?

The type of bankruptcy you file affects how long it stays on your credit report.

Individuals filing bankruptcy usually use two types: chapter 7 and chapter 13.

Chapter 7 Bankruptcy

In a chapter 7 bankruptcy, you liquidate your assets.

Your creditors then apply the proceeds to your debt. Not all of your assets can be liquidated, though.

Exempt property varies by state, but often includes items like necessary household goods, your car, and part of the equity in your home.

Many chapter 7 filers don’t have enough eligible assets to cover the full amount of their debt.

However, the total debt is considered discharged by the courts if the chapter 7 filing is accepted.

Your bankruptcy discharge may cover most of your debt, but chapter 7 bankruptcy could have the biggest negative effect on your credit.

A chapter 7 bankruptcy can stay on your credit report for up to 10 years.

Chapter 13 Bankruptcy

Your bankruptcy attorney may suggest that you file chapter 13 bankruptcy if you have a steady income.

Unlike chapter 7, chapter 13 lets you make partial repayments on some debts while discharging others.

You’ll develop a repayment plan and get it approved through the courts. Repayment plans can be between three to five years.

Chapter 13 bankruptcy stays on your credit report for up to seven years.

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How to Start Building Credit After Bankruptcy

Filing for bankruptcy may have you feeling relieved that your debt is under control, but worried about your credit score.

When you’re ready to open a new credit account, you have options—even if lenders require higher interest rates or payments due to your credit history.

Credit Cards

Credit cards are one of the easiest ways to rebuild credit after bankruptcy.

Many credit card issuers have cards specifically for borrowers trying to rebuild their credit.

Remember to use your new credit card account wisely.

Credit cards are convenient, but that makes it easy to overspend and get into credit card debt.

There are two types of credit cards—unsecured and secured.

Unsecured Credit Cards

An unsecured credit card doesn’t require collateral, such as a cash deposit.

Credit card companies use your credit report to determine your creditworthiness for an unsecured card.

If they think you can make your credit card payments on time, they may give you an unsecured card.

Getting an unsecured card after bankruptcy is often difficult.

Secured Credit Cards

A secured credit card could be a better option post-bankruptcy.

Secured cards use a cash security deposit into a savings account as collateral. If you can’t pay your credit card balance, the issuer uses your deposit to cover the bill.

Your deposit is usually your credit limit. For example, if you deposit $500, you can spend up to $500 on the card.

Most secured cards refund your deposit after you make consistent, on-time monthly payments.

Installment Loans 

Most traditional loans—like a mortgage or car loan—are installment loans.

An installment loan has fixed payments, called installments, that repay your loan over time.

Your monthly payment will include the cost of interest for the loan.

Staying up-to-date with an installment loan helps build your credit over time. It can also show lenders that you’re capable of managing your personal finances each month.

You can get a secured or unsecured loan. Secured loans include collateral, such as a car loan.

Your lender could take possession of your car if you can’t make your payments. Personal loans, on the other hand, are usually unsecured.

Credit-Builder Loans

Credit-builder loans are a special type of installment loan to help you build credit.

They’re generally short-term loans for small dollar amounts. You might only have a credit-building loan for six months or a year, but it can help jumpstart your credit after bankruptcy.

Tips to Get Started Rebuilding Your Credit

Rebuilding your credit after bankruptcy isn’t always easy.

It can take years to get back to a good credit score, so you’ll need the discipline to stay on track.

Try these tips to help you stick to your credit rebuilding plan.

Keep a Steady Income

Consistent income is key to keeping up with your remaining debts after bankruptcy.

The last thing you want to do after filing bankruptcy is to stop paying your other debts like student loans.

A steady income can also help you qualify for new credit accounts.

Lenders who offer bad-credit loans use your income to help determine creditworthiness.

If they see you make a reliable income each month, they may be more willing to lend you money.

Make Payments on Time

Your payment history makes up 35% of your FICO score, making it the most important factor.

Positive payment history includes consistent on-time payments.

Missing or late payments hurt your score and make it more difficult to get approved for credit.

Don’t Overuse Your Credit

Credit utilization is the second most important part of your credit score.

Your credit utilization ratio is how much credit you’re using compared to your available credit.

For example, you have a credit card with a $1,000 limit. You spend $500 on the card. Your credit utilization is 50%.

A good credit utilization rate is generally considered anything below 30%.

However, it’s even better to keep it below 10%.

Find a Co-signer

If you need to borrow money after bankruptcy, you may have to apply for a loan with a co-signer.

Co-signers agree to take on your debt if you fail to make your payments.

Because of the risk for the co-signer, you need to find someone who trusts you, such as a family member or good friend.

You Can Rebuild Your Credit After Bankruptcy

If you’re considering bankruptcy, know the potential consequences to your score.

Having a bankruptcy on your credit report can hurt your credit score, but you can rebuild it.

Make a plan to start rebuilding your credit as soon as possible after your bankruptcy is discharged.

With a plan and a full understanding of how your bankruptcy will shape the next few years, you can better navigate the ups and downs to come.

Tara Seboldt

Tara is a financial writer with over five years of professional writing experience. She previously worked at a financial planning firm. Tara uses this professional experience to help readers better understand their finances and make smart financial moves. When she’s not writing about money, Tara enjoys spending time in the Idaho mountains hiking, camping, and skiing.

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