How To Rebuild Credit After Bankruptcy

Introduction

Entrepreneurs, innovators and other risk-takers drive the economy. But they can also find themselves stuck in mud along the journey. So whether you own a small business, do freelance work, or you’re just trying to make the most of your income, it’s pretty likely that you’ll face unexpected financial setbacks at some point.

And if the obstacles you face are too big to hurdle, you might find yourself considering bankruptcy. The decision shouldn’t be made lightly, but if you do go down that road, it doesn’t mean your credit score is ruined for good.

Bankruptcy is designed to give individuals and small business owners the chance to start fresh and hopefully come back even stronger than before — but that process takes time. If you’ve taken the bankruptcy route and want to reclaim your financial health, these tips will make the journey easier.

How Does Bankruptcy Affect Your Credit Score?

The first thing to understand is that, depending on the type of bankruptcy, it will appear on your credit reports for 7 to 10 years.

Chapter 7 (liquidation bankruptcy)

Chapter 7 bankruptcy stays on your report for 10 years. It’s for people who don’t make enough to pay back their debt, so most of it is forgiven and home foreclosure can be temporarily delayed.

However, this model requires you to either sell any possessions valued over a certain threshold, or reaffirm the debt and continue to pay it.

Chapter 13 (reorganization bankruptcy)

Chapter 13 bankruptcy stays on your report for 7 years. It’s for people who make too much to qualify for Chapter 7, but the debt has to be below a certain amount. This option doesn’t make you sell your things, and can stop your home from being foreclosed by giving you time to pay.

But your debt isn’t forgiven, so you have to follow a strict budget and court-ordered monthly payment plan.

As for how much all this impacts your credit score, it depends on where you started. If you had excellent credit, it could fall 200 points or more. If average, you could expect to lose around 150 points. And if your credit score was poor, you might actually see it go up a little after filing for bankruptcy.

How To Rebuild Credit After Bankruptcy

Rebuilding your credit after bankruptcy is the same process as building your credit in general. The most important thing to do is pay all your bills on time, every time. This is one of the fastest and most effective strategies to repair a bad credit score because payment history is one of the biggest factors calculated into your credit score.

By paying at least your minimum due — and preferably the whole balance — on or before the due date, you demonstrate to creditors and lenders that you are financially trustworthy and can manage your monthly expenses.

The second thing to do is keep your credit utilization ratio low. Ideally, you should only use 30% or less of your available credit limit. This tells creditors that you’re not desperate and will likely pay off your current debts in a timely manner, which ultimately lifts your credit rating.

Monitor Your Credit Report

While it’s always a good idea to keep a close eye on your credit report, it’s particularly important when rebuilding your credit after declaring bankruptcy. You can request a copy of your credit report from each of the three major credit bureaus — Experian, Equifax and TransUnion. The law grants you one free copy of each report every year, but they’re now available weekly at the federally authorized AnnualCreditReport.com.

Whether you get all three or one at a time, inspect each report closely to ensure the information is correct. If you run across an inaccurate item that could negatively impact your score (and your ability to secure loans or lines of credit), dispute the error by submitting a letter with supporting documents that prove the mistake.

Ease Back Into Credit

You may not qualify for a new credit card right away, but you can ease back into things with a secured card. You need to pay a security deposit in order to get one, and the amount is usually equal to your credit line. But unlike just using that cash to buy something, a secured card helps rebuild your credit.

Buying things with your card and making timely payments demonstrates responsible and consistent repayment habits. Paying off your full balance each month is the best strategy if you want to boost your score quickly and avoid interest charges. And of course, don’t max out the card as you go — keep it under that 30% credit utilization ratio for the best results.

Become an Authorized User

If you can’t or don’t want to get a secured card, another option is to become an authorized user on someone else’s credit card account. Most often this would be a family member, like a parent or spouse, but it could be anyone who’s willing to let you be named on their account.

Not all creditors report payment activity to the credit bureaus in an authorized user’s name, and some only do it if the authorized user is a spouse. But if you do become a user on an account that gets reported, all the positive payment history — both yours and the main account holder’s — could reflect on your credit report and help you build credit faster. Just keep in mind that the reverse is also true, so if the account holder misses payments or maxes out their card, that could be another black mark on your report.

How Long Will It Take to Rebuild Credit After Bankruptcy?

You know how long the bankruptcy remains on your credit reports, but rebuilding your credit score is a different story. The good news is that this part is usually shorter.

Many people are able to improve their credit scores in as little as 12 to 18 months after bankruptcy, just by following tried-and-true credit rebuilding strategies. Again, that’s charging a little bit each month and making on-time payments — in full if possible.

Bottom Line

It takes discipline and patience to be successful over the long haul, and restoring your credit after bankruptcy is no different. It’s a marathon rather than a sprint. But with perseverance, you’re off to a great start on the path to better credit.

If you need a new credit card to help you down that road, you might qualify for a card that’s dedicated to rebuilding credit. Seeing if you pre-qualify won’t harm your credit score, and you can always fall back on a secured card if necessary.