How to Build Credit After Bankruptcy

Declaring bankruptcy is seldom an easy choice. But when you’re facing financial hardship, filing for bankruptcy protection from creditors could provide you with some much-needed relief.

Of course, bankruptcy comes with downsides as well—one of the biggest being the damage bankruptcy can cause to your credit reports and credit scores. After you file for bankruptcy, it can be difficult to qualify for new financing in the future, like credit cards and loans. Yet if you work to rebuild your credit after bankruptcy, you could eventually put yourself in a better position.

The guide below is full of helpful tips on how to build your credit after bankruptcy. You’ll also find answers to common questions about how bankruptcy affects your credit, how long it takes to lift your credit score after filing for bankruptcy, and whether it’s possible to remove a bankruptcy record from your credit report altogether.

How bankruptcy affects your credit

In general, filing for bankruptcy protection from your creditors affects your credit score in a negative way. Bankruptcy can also have a negative impact on your credit history. Yet the exact impact that bankruptcy may have on your credit can vary from one consumer to the next.

According to Experian, bankruptcy could trigger a credit score drop as severe as 200 points. For other consumers, the credit score impact of a new bankruptcy record could be far less significant.^[1]

Any credit score changes you experience after filing bankruptcy will depend in large part on the previous makeup of your credit report. If you start with a mostly clean credit report (e.g., few negative items and a good credit score), then adding a bankruptcy could cause serious credit score damage.

On the other hand, if your credit report is already filled with negative information like late payments, collection accounts, charge offs, and perhaps a foreclosure or repossession, you likely already have a bad credit score. In this scenario, adding a bankruptcy to the mix might not trigger such a big drop in your credit score.^[2]

How long bankruptcy stays on your credit report
Another downside of filing bankruptcy is the fact that the record has the potential to remain on your credit report for a significant period of time. The type of bankruptcy you file determines how long the item may stay on your credit.

Below are two of the most common types of bankruptcy and how long they can remain on your credit.

• Chapter 7 bankruptcy may remain on your credit report for up to 10 years from the filing date.
• Chapter 13 bankruptcy may remain on your credit report for up to 7 years from the filing date.^[3]

Is it possible to rebuild credit after bankruptcy?

It is possible to rebuild your credit after bankruptcy. Yet it’s important to understand that a successful credit-rebuilding process requires patience and consistent effort.

As long as a bankruptcy record appears on your credit report (up to 7-10 years depending on the type of bankruptcy), it could have a negative impact on your credit score. On a positive note, the impact of an aging bankruptcy should decline as time passes.^[4]

A recent bankruptcy filing typically causes more credit score damage than an older bankruptcy record. But you don’t have to wait until a bankruptcy record comes off your credit report to start the rebuilding process either. Even while a bankruptcy remains on your credit, you can take positive steps to try to offset some of the damage it may be causing.

How to rebuild your credit after bankruptcy

If you’re looking to rebuild your credit after a bankruptcy, there’s no such thing as a quick fix. But the steps below could be a good starting point.

1. Review your credit reports

Whether you’re rebuilding your credit after a bankruptcy or building credit from scratch, one of the first steps you should take is to check your credit reports from all three credit bureaus—Equifax, TransUnion, and Experian. The good news is you can get free credit reports once a week from AnnualCreditReport.com.

As you review your three credit reports, it’s important to confirm that your credit history is accurate. Any accounts that were discharged in your bankruptcy should be reported as closed. Otherwise, your credit scores could be unfairly penalized.^[5]

If you discover credit errors, you can and should dispute any inaccurate information with the appropriate credit bureaus. According to the Fair Credit Reporting Act (FCRA), you have the right to dispute inaccurate or incomplete information that appears on your credit report.^[6]

2. Establish new accounts

Adding positive accounts to your credit report is another possible way to rebuild credit after a bankruptcy. Although new accounts won’t wipe out a bankruptcy record or any negative items you included in a bankruptcy, they might help offset some of the damage it caused.

It’s important to understand that some lenders and credit card issuers may not be comfortable loaning money to you with a bankruptcy on your credit report. Yet it’s typically possible to qualify for certain types of loans or credit cards even if you have filed for bankruptcy in the past.

If you want to establish new credit accounts after a bankruptcy, below are a few options to consider.

• Secured credit cards: A credit card can be a useful tool for building credit after a bankruptcy (provided you manage the new account in a responsible manner). But you may want to consider a secured credit card if you have a bankruptcy on your credit report—especially a recent bankruptcy filing—since qualifying for certain unsecured credit cards could be more difficult in this situation. With a secured credit card, you make a security deposit that’s typically equal to the credit limit on the account. This deposit reduces the card issuer’s risk. So, it may be more comfortable issuing you a new account even with less-than-perfect credit history.
• Credit builder loan: Another credit-building tool you might want to consider if you’ve filed for bankruptcy is a credit builder loan. With this type of loan, the issuing lender holds onto your loan proceeds until you complete all of your loan payments. This arrangement reduces the risk to the lender. As a result, the issuing bank may be more comfortable approving borrowers who are new to credit and those who have credit challenges, such as previous bankruptcy records on their credit reports.
• Authorized user: Becoming an authorized user on a family member or friend’s credit card is another strategy that might help you build credit after bankruptcy. However, it’s important to confirm that the credit card issuer reports account information to the credit bureaus for both primary account holders and authorized users in order to benefit from this approach. Additionally, you should only ask a friend or family member to add you to a credit card they consistently pay on time. Being an authorized user on a credit card with a low credit utilization ratio and an older credit card can be helpful as well due to the factors that influence credit scores. If you become an authorized user on a credit card with negative information (e.g., late payments or a high credit utilization ratio), the account could hurt your credit score instead of helping it.
• Rent and utility reporting: In general, paying rent doesn’t help you build credit. But if you sign up for a third-party rent reporting service, like Self’s free rent reporting subscription, you could add your monthly rent payment to your credit reports. Other alternative credit-building services might help you establish credit with subscriptions, utility, or mobile phone payments as well. And if you’re interested in adding eligible utility and cell phone payments to your TransUnion credit report, you might want to consider Self’s Rent+Bills subscription for a monthly fee.

3. Practice responsible financial and credit management habits

Developing smart financial and credit management habits is also essential if you want to build good credit after bankruptcy. Below are some tips that could help.

• Pay on time. No matter what types of new accounts you open, on-time payments are a must. Payment history is the most significant factor in your credit score calculation, accounting for 35% of your FICO® Score. Depending on your situation, even the occasional late payment could be a big setback on the journey toward good credit.^[7]
• Keep credit card debt low. As a rule, the best way to handle a credit card is to pay off your full balance every month, on or before the statement due date. Creating this habit can help you avoid credit card debt and enjoy your credit card benefits without paying high interest charges. Plus, keeping your credit card balances low could also help you protect your credit score with a low credit utilization ratio.
• Monitor your credit reports and credit scores. As you’re working to rebuild credit, it’s important to keep an eye on your progress. Therefore, it’s wise to check your three credit reports and review them for accuracy on a regular basis. After a bankruptcy discharge, it’s important to confirm that the credit bureaus update any accounts included in the bankruptcy to a zero balance. (Note: These accounts may also reflect a notation of “included in bankruptcy.”)^[8]
• Update your budget. Creating a budget could go a long way toward helping you accomplish the financial goals that are most important to you. A budget doesn’t have to be about restriction, but rather a tool to reduce financial stress.

How long does it take for my credit score to lift after bankruptcy?

Depending on the type of bankruptcy you file, this type of negative record on your credit report could impact you for up to ten years. As long as a bankruptcy is on your credit report, it could hurt your credit score to some degree. But certain actions might help your credit score to lift along the way.

When your credit report updates to show that your bankruptcy is discharged, there’s a chance you might see a bump in your credit score according to Equifax. However, it’s important to note that every situation is different. With a Chapter 7 bankruptcy, the discharge process typically takes between four to six months. If you file a Chapter 13 bankruptcy, however, you won’t be eligible for discharge until you complete the repayment plan—usually around three to five years after filing.^{[3] [9]}

Actions you take can also play a big role in determining how long it takes to rebuild your credit after bankruptcy. The sooner you begin to re-establish good credit, the sooner you should expect your credit score to start to recover. But if you have more credit setbacks after a bankruptcy like new late payments, collection accounts, or other negative items, then working to overcome bad credit could take longer.

Removing bankruptcy from your credit report

The Fair Credit Reporting Act (FCRA) allows the credit bureaus to keep bankruptcy records on your credit reports for up to ten years. Yet the same federal law requires the credit bureaus to report accurate and verifiable information on your credit reports as well.

If you question or disagree with an item on your credit report—including a bankruptcy or an item included in a bankruptcy filing—you have the right to dispute it with any credit bureau. In your dispute, you can ask Equifax, TransUnion or Experian to correct or remove the inaccurate information from your credit report.

When you submit a dispute, the credit bureau must investigate your claim and remove or correct any incorrect information (typically within 30 days). But if a credit bureau determines that an item you dispute is accurate, it can verify the information and keep it on your credit report.^[10]

Bottom line

Filing for bankruptcy protection from your creditors could provide you with relief if you’re in a desperate financial situation and don’t see another way out. But this solution may also have long-term credit consequences. So, it’s not a decision you should make without careful consideration.

If you do file bankruptcy, however, you shouldn’t feel like you can never build good credit again. While it may require hard work and patience, it is possible to start getting your credit back into better shape for the future.

Sources

1. Experian.com. “How Does Filing Bankruptcy Affect Your Credit?” https://www.experian.com/blogs/ask-experian/how-does-filing-bankruptcy-affect-your-credit/
2. myFICO.com. “What Are the Different Types of Bankruptcy and How Is Each Considered By MyFICO® Score?” https://www.myfico.com/credit-education/faq/negative-reasons/bankruptcy-types
3. Equifax.com. “How Can I Reestablish Healthy Credit Habits After Bankruptcy?” https://www.equifax.com/personal/education/personal-finance/articles/-/learn/rebuilding-credit-after-bankruptcy/
4. myFICO.com. “How can I minimize the negative effect of a bankruptcy? https://www.myfico.com/credit-education/faq/negative-reasons/minimizing-bankruptcy-effects#:~:text=How%20can%20I%20minimize%20the,bankruptcy%20will%20lessen%20over%20time
5. Equifax.com. “You Ask, Equifax Answers: How Can I Reestablish Healthy Creidt Habits After Bankruptcy?” https://www.equifax.com/personal/education/personal-finance/articles/-/learn/rebuilding-credit-after-bankruptcy/
6. Consumerfinance.gov. “A Summary of Your Rights Under the Fair Credit Reporting Act.” https://files.consumerfinance.gov/f/201504_cfpb_summary_your-rights-under-fcra.pdf
7. myFICO.com. “What Is Payment History?” https://www.myfico.com/credit-education/credit-scores/payment-history
8. WMTXLaw.com. “How Discharged Debts In Bankruptcy Appear On Your Credit Report.” https://www.wmtxlaw.com/discharged-debts-appear-credit-report/#:~:text=they%20shouldn%27t.-,Debts%20with%20Zero%20Balance,existing%2C%20but%20with%20zero%20balance
9. Experian.com. “What Is a Bankruptcy Discharge?” https://www.experian.com/blogs/ask-experian/what-is-a-bankruptcy-discharge/
10. Consumer.FTC.gov. “A Summary of Your Rights Under the Fair Credit Reporting Act.” https://www.consumer.ftc.gov/sites/default/files/articles/pdf/pdf-0096-fair-credit-reporting-act.pdf

About the author

Michelle Lambright Black is a nationally recognized credit expert with two decades of experience. She is the founder of CreditWriter.com, an online credit education resource and community that helps busy moms learn how to build good credit and a strong financial plan that they can leverage to their advantage. Michelle's work has been published thousands of times by FICO, Experian, Forbes, Bankrate, MarketWatch, Parents, U.S. News & World Report, and many other outlets. You can connect with Michelle on Twitter (@MichelleLBlack) and Instagram (@CreditWriter).

Editorial policy

Our goal at Self is to provide readers with current and unbiased information on credit, financial health, and related topics. This content is based on research and other related articles from trusted sources. All content at Self is written by experienced contributors in the finance industry and reviewed by an accredited person(s).