Rebuilding Credit After Bankruptcy

Written by

Alexa Tanen

Alexa Tanen

Alexa is a skilled freelance writer and editor who takes pride in creating insightful banking and finance articles. With her approachable writing style, she turns complex topics into easy reads. When not writing, Alexa enjoys the company of her two beloved cats.

Last Update on Nov 29, 2023

Bankruptcy is never an easy situation. Any kind of bankruptcy can stay on your credit report for up to 10 years, but its impact on your credit score decreases over time. In fact, bankruptcy can be a good opportunity to start fresh, building up your credit score instead of continuing to struggle.

You can start rebuilding your credit score almost immediately after filing for bankruptcy.

Understanding The Impact Of Bankruptcy

Bankruptcy can lead to a significant drop in your credit score, but the length of time you’re impacted depends on the type of bankruptcy. There are two types of bankruptcy: Chapter 7 (the most common) and Chapter 13. Chapter 7 removes debts without collateral, such as credit card debt, medical bills, and personal loans. This type of bankruptcy stays on your credit report for ten years.

Chapter 13 bankruptcy, on the other hand, doesn’t wipe out debts. It merely restructures them into a more manageable payment plan that typically lasts between three and five years. Because you are still planning to pay off your debts, it doesn’t impact your credit score for as long. Chapter 13 bankruptcy only stays on your credit report for seven years. There are several tips you should take to heart to rebuild your credit.

Check And Monitor Credit

One of the most important aspects of building your credit is keeping track of anything that impacts your score. That means regularly checking credit reports for accuracy. Unfortunately, you don’t just need to worry about identity theft. Credit bureaus make mistakes, too. There are free resources like AnnualCreditReport.com, which you can access once a week to check on your credit reports. These credit reports are used to calculate your credit score, so maintaining accuracy is critical. If you find a mistake, you can dispute it. 

Adopt Responsible Credit Habits

There are good habits to get into that will help you rebuild your credit. One of the most important is making on-time payments. Bankruptcy may wipe out existing debt or reorganize it, but it doesn’t affect future debt. When you use your credit card or need to make payments on other debts, do your best to be on time.

Speaking of which, if possible, try to reduce your credit card usage. If you don’t charge very much to your card, it’ll be a lot easier to make your monthly payments on time. Similarly, if you previously carried a large credit balance from month to month, try to reduce that whenever you can. If possible, pay off your monthly balance each time.

If you can, try to put away a small amount each month to slowly build up an emergency savings fund. Having some money put away for a rainy day might be the difference between making a future payment on time and not.

Secured Credit Cards

Another way to build your credit is to look into secured credit cards. A secured credit card requires a down payment, which is the credit limit, unlike unsecured cards. Basically, the card guarantees that you can always pay the credit limit, so the company isn’t taking a risk with you. They also typically have annual fees and high interest rates.

The good news is that these cards are usually temporary. As you work to rebuild your credit and demonstrate your trustworthiness to credit companies by making consistent payments, you can eventually graduate to an unsecured card in the future.

Credit-Builder Loans

If you need more money, but traditional loans are unreachable, you can opt for credit-builder loans. You’ll usually find these through community banks or credit unions, and they are for small amounts (under $1,000) with repayment terms of one to two years. 

They don’t require you to have good credit, but they do require that you have the income to make the payments on time. The way it works is that the loan amount is held in a secure bank account while you make your payments. Every time you make (or miss) a payment, the bank files a report with one of the three credit bureaus.

Once you’ve completed the payments, you’ll receive the payment. You can use that money for an emergency savings fund. Plus, by sending the reports of your successful payments to the credit bureaus, you demonstrate that you’re committed to rebuilding your credit.

Seeking Assistance

There are other ways to rebuild your credit without turning to an unsecured credit card or credit-builder loan. If you have someone you trust, you can be a co-signer for a loan or rental agreement. Your friend or relative will need a good credit history for it to work, and it is a risk: you’re held responsible if the other party fails in their financial obligations. 

For a less fraught option, you could ask to become an authorized user on someone else’s credit card. This is risky for the other person since they’re obligated to pay if you don’t or can’t, but if it’s someone who knows how committed you are, it can be a great way to rebuild your credit. You just have to ensure the credit card reports your payment activity to the credit bureaus. 

However, becoming an authorized user doesn’t help your credit score as much as the other methods listed.

Timeframe For Rebuilding Credit

While filing for bankruptcy will stay on your credit report for years, that doesn’t mean that it will necessarily take that long to rebuild your credit. You should still be prepared to play the long game, though. It will likely take a few years to reestablish yourself credit-wise.

 With a Chapter 7 bankruptcy, you immediately reduce your debt-to-income ratio. Despite the bankruptcy staying on your credit report for ten years, that ratio reduction could mean that you could raise your credit score within one to two years by maintaining good credit habits.

Conversely, a Chapter 13 bankruptcy reorganizes your debt instead of eliminating it. It will probably take longer, three to five years, before you see good credit. However, if you are cautious, you are often eligible to refinance out of the Chapter 13 a year and a half after filing, which will immediately increase your credit score.

Don’t Fall For Scams

As in other aspects of life, you should always be wary of quick fixes. Avoid companies that advertise themselves as such. There’s nothing wrong with working with reputable credit counseling agencies, but you should be wary of scams and vet companies carefully before committing to them.

Frequently Asked Questions (FAQs)

Find out more

• How to Build Credit – Effective strategies for building a strong credit history.
• Challenge Items on Your Credit Report – Learn how to dispute errors on your credit report.
• How to Fix Credit – Simple steps to improve your credit score.
• Fix Your Credit Effectively – Comprehensive guide to credit repair.
• Remove Collections from Credit Report – Strategies to clear collections from your credit history.
• Remove Hard Inquiries – Minimize the impact of hard inquiries on your credit.
• Updating Personal Information on Credit Reports – Ensure your credit report reflects accurate personal information.
• Soft vs Hard Credit Checks – Know the difference and how they affect your credit score.

Alexa Tanen Author

Alexa is a skilled freelance writer and editor who takes pride in creating insightful banking and finance articles. With her approachable writing style, she turns complex topics into easy reads. When not writing, Alexa enjoys the company of her two beloved cats.