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After a bankruptcy filing, the task of repairing your credit begins. But how soon can you apply for new credit? It depends on the type of bankruptcy you filed because your bankruptcy must first be discharged. This can take as little as six months or as long as five years.
Types of bankruptcy
There are two types of bankruptcy for most consumers: chapter 7 and chapter 13.
- Chapter 7 will eliminate most all debt (with a few exceptions, notably student loans, back child support and IRS debt) with no payback required.
- Chapter 13, sometimes called a ‘wage-earner’ plan, is a reorganization of debt. This type requires some repayment over time based on your disposable income (per tough IRS guidelines) and the amount of debt you have.
Most consumers in crushing debt would prefer a chapter 7 bankruptcy to get a fresh start by liquidating all debts. However, to qualify for a chapter 7, you must pass a means test that assesses your income to determine if it’s over the median for your state and how much disposable income you have.
Chapter 7 is the most efficient and most damaging form of personal bankruptcy. It remains on your credit report for a full 10 years. However, once the chapter 7 has been filed, it is usually discharged (completed) in four to six months. So, while chapter 7 has the longer period of damage to your credit report, it has the shortest time to begin repairing your credit.
If you don’t qualify for chapter 7, you may have to take a chapter 13 bankruptcy. This chapter requires repayment of a portion of your debt over three to five years. Chapter 13 will remain on your credit report for seven years from the filing date and is not discharged until your debt is paid off. Getting conventional credit or loans during this time is very unlikely.
Applying for a credit card after bankruptcy
As noted, your bankruptcy must be discharged in federal bankruptcy court before you can apply for any new credit; the bankruptcy notation does not have to be gone from your credit report, it just needs to be discharged. Your credit score will suffer serious damage from the bankruptcy, no matter the chapter filed.
To improve your credit score, you must begin by repairing your credit report. The process is similar to just starting out using credit for the first time. However, in addition to adding positive behaviors to your credit report, you also have to contend with the negative items that already exist.
Before you begin to apply for new credit, have a game plan to handle any new debt you take on. Don’t get trapped again by letting out-of-control debt sneak up on you. The credit counseling required for filing and discharging can help you put together a credit management plan that works for you.
Check your credit score
Before you apply for new credit, you should check your credit score to know exactly where you stand. You might have access to your score through your bank or other financial institution, but there are many free ways to check your credit score. Also, anyone can get their credit report for free at annualcreditreport.com. While this site does not offer free scores, it is a valuable tool to check for the accuracy of your credit file because it is this information that defines your score.
Be vigilant and skeptical of any unsolicited offers of credit purported to help you recover. Bankruptcy filings can be a mailing list for high-cost products or scams.
Assess your options
Knowing your score will help you target the timing of credit card reentry and find a card you can qualify for. This is important to remember because the bankruptcy will likely prevent you from qualifying for top-tier cards, and each application will entail a credit inquiry, further lowering your damaged score.
So, aim for the best card you can get at the score range you fall within. Bankrate’s CardMatch tool is a good place to start. A secured card may be your best bet. Getting a top-tier card will come in time, but for now, baby steps are key.
There are also cards with no credit requirements. Many of these cards are designed for college students and others new to credit. All credit cards are required to have a Schumer Box outlining their terms. Look this over carefully and avoid anything misleading or confusing.
Rebuilding your credit with a credit card
Once you have a credit card or loan, the number one key to rebuilding your credit begins with paying all of your bills—not just your credit card bills—on time, every time. Resist the temptation to ask for an increase in credit line once you have a card until you see your score recover. Otherwise, the answer will most likely be no, and you’ll damage your score with a hard inquiry.
Keep your credit card balances low. Ideally, you should keep them as close to zero as possible. Remember that this first card won’t come with a great rate and may even be secured by your own money. So, keeping your balances low is going to go a long way in building the credit utilization portion of your credit score (second only to on-time payments in importance). Plus, it will save you money in interest if you don’t carry a balance.
Finally, if you are a renter, be sure that your landlord is reporting your rent payments. If not, you might look into a rent reporting service. Your rent may be your highest monthly obligation, and having those on-time payments reported can help. You might also look into the Experian Boost program that will report utilities and other monthly obligations.
The bottom line
Your bankruptcy must be fully discharged before you can apply for a new credit card. If you file chapter 7 bankruptcy, your debt will likely be discharged in four to six months. If you file chapter 13 bankruptcy, it will be three to five years.
Applying for new credit is key to rebuilding your score, but it’s important to have a plan to use your credit responsibly. With your new card, be sure to make healthy habits like paying on time each month and keeping your balances low.