Rebuilding credit after bankruptcy

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If you’ve recently filed for bankruptcy, you’ll likely be faced with higher rates on loans and credit cards due to a subprime credit score. However, while it will be hard to improve your credit score initially, it’s never too early to start rebuilding your credit.

Here are a few rules of thumb to build credit after bankruptcy:

How to rebuild your credit after bankruptcy

If you are currently going through or have recently gone through a bankruptcy, there are a few things to keep in mind when rebuilding your credit.

Don’t try to borrow money too quickly

Instead of trying to get funds right away, focus on making timely payments on existing loans or credit cards every month to help reestablish your credit. Payment history makes up 35 percent of your FICO score, so on-time payments is one of the best ways to build your credit.

Applying for new loans or credit cards will also trigger hard inquiries on your credit report, which can lower your score even further.

Why this matters: Each credit inquiry or denial on your credit report can have a negative impact on your credit score, making it even harder to rebuild your credit after a bankruptcy.

How to get started: Work on making timely payments on your existing accounts to boost your credit score before applying for new funds.

Build an emergency fund

Since much of your debt will likely be eliminated following a bankruptcy, it’s an ideal time to start building up your savings. By putting a portion of your income into a savings account or cutting back on nonessential subscription services or memberships, you avoid having to apply for loans — which could put you back into debt if you’re unable to keep up with the high interest rates that come along with bad credit.

Why this matters: Without an emergency reserve, it can be easy to fall into the same debt pitfalls that caused the bankruptcy.

How to get started: After your debt payments are removed as part of the bankruptcy process, make sure to create a budget based on your income and remaining expenses. Include building an emergency fund as part of your new budget.

Keep a close eye on your credit reports and credit scores

Every year, you are entitled to one free copy of your credit report from each of the three major credit-reporting institutions: Equifax, Experian and TransUnion. Take advantage of this and regularly examine your reports for errors or missing information. If you find any inaccuracies, such as a delinquent account that doesn’t belong to you, you can report it to the appropriate credit-reporting agency. When the negative mark is removed, your credit score will likely rise.

Why this matters: Inaccurate information on your credit reports can cause a low credit score.

How to get started: Use to access each of your credit reports for free. Through April 2021, you can access each of your reports once a week. Many credit card companies also provide you regular updates of your credit score to monitor.

Think twice about working with credit repair agencies

Instead of paying a credit repair agency, consider using that money to increase your emergency fund and savings. Focus your efforts on the habits and circumstances that led to your bankruptcy and how you can change them.

“There are many unscrupulous agencies out there that will claim they can remove a bankruptcy or fix a credit report,” says Samah Haggag, a senior marketing manager for Experian. “There is nothing a credit repair organization can do that you cannot do yourself.”

Why this matters: Credit repair agencies take the heavy lifting out of credit-building, but they charge fees. If you’re willing to put in the work of checking your credit reports and disputing errors, you can save that money and use it to continue paying down existing debt.

How to get started: Take a look at your budget and request copies of your credit report yourself before looking into credit repair agencies.

Factors to consider

How long does it take to rebuild credit after Chapter 7?

A bankruptcy stays on your credit report for 10 years. However, former bankruptcy attorney Kevin Chern says that when a person files Chapter 7 liquidation bankruptcy, the debtor immediately and dramatically reduces their debt-to-income ratio, which could set the stage for a rising credit score a year or two down the line.

“You also eliminate your ability to qualify for Chapter 7 for another eight years,” he says. “In the eyes of a potential lender, you may actually appear to be a better risk immediately.”

How long does it take to rebuild credit after Chapter 13?

Chern also says that most Chapter 13 petitioners will see a reduction in debt-to-income ratio, but this won’t occur as quickly.

“After three to five years of living on a strict budget, Chapter 13 debtors should be much more equipped to manage their money efficiently,” he says. “In many cases, after 18 months of regular Chapter 13 payments, a debtor can refinance out of a Chapter 13, especially if the debtor has any equity in a home.”

Can you get credit after bankruptcy?

Although it may be harder to find a lender willing to offer you a competitive product, there are still ways to get credit after bankruptcy. Some types of credit you could receive include:

  • Secured credit card. You’ll make a deposit into a secured account and receive a credit card with a credit line that’s 50 percent to 100 percent of that deposit. Make sure to check fees and confirm that the bank reports your credit card limit to the major credit card bureaus, offers periodic credit increases and doesn’t report the card as secured.
  • Car financing. Chern says that it’s possible for a Chapter 7 debtor to finance a car the day after filing. Additionally, “a Chapter 13 debtor may be able to finance a car while the repayment plan is still in effect, although the trustee’s permission is required after showing that the car is necessary to complete the debt repayment.”
  • Conventional mortgage. Most experts say that it will take 18 to 24 months before a consumer with reestablished good credit can secure a mortgage loan after personal bankruptcy discharge. Credit-impaired borrowers should prepare to pay interest rates that are 2 points to 3 points over conventional rates.
  • FHA-insured mortgage. Chapter 13 filers can get an FHA-insured mortgage if they’ve made timely payments for one year and the debtor has received the court’s permission. Debtors with a Chapter 7 bankruptcy discharge must wait at least two years after discharge and establish a history of good credit.

Next steps

Bankruptcy is a painful process, but when used responsibly it can help to give you a fresh start. When rebuilding credit after bankruptcy, create a new budget with your updated income and expenses, start an emergency fund and avoid applying for new loans or credit cards unless absolutely necessary. Most importantly, keep tabs on your credit reports and scores to make sure that your efforts are working.

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Written by
Dan Miller
Points and Miles Expert Contributor
Dan Miller is a contributing writer for Bankrate. Dan writes about loans, home equity and debt management.
Edited by
Student loans editor