Updated on 06.27.16

Rebuilding Your Credit After Bankruptcy

People tend to think of bankruptcy as the financial equivalent of breaking a mirror — seven years’ bad luck. And while bankruptcy is no walk in the park, fear can prevent people from using it as it was intended: as a a tool to get their financial house in order.

Make no mistake about it, though: There is life after bankruptcy. Whether or not you should file for bankruptcy is a deeply difficult and personal decision, but you should let the facts, not your fears, be your guide.

The Type of Bankruptcy Matters

Before getting too deep into the reeds, it’s important to talk about the two different kinds of bankruptcy available to individuals:

  • Chapter 7: When you file this kind of bankruptcy, you basically wipe out all your debts. It will stay on your credit report for 10 years.
  • Chapter 13: This type of bankruptcy involves a plan to pay off part or all of your debts over the course of three to five years. It will stay on your credit report for seven years.

Of course, there are many more differences between the two. But as a general rule, Chapter 7 presents more difficult and longer-reaching complications for your credit than Chapter 13.

How to Repair Your Credit After a Bankruptcy

The first thing you need to remember is that the entire purpose of bankruptcy is to get your financial life back on track. So don’t feel like it’s the end of the line. Rather, it’s a new beginning.

What’s more, remember that older information on your credit report is less important than more current data points. With this in mind, let’s talk about what you can do to start repairing your credit after you’ve declared bankruptcy.

Step one is getting credit. You might be understandably a little gun-shy after ruining your credit the last time around. But you’ve hopefully learned something about how to use credit responsibly. More importantly, there’s no way to start repairing your credit without using credit.

Start off by getting a secured credit card, not a prepaid debit card. Most secured cards require a deposit, such as $500, which acts as your credit limit. Make small purchases each month, pay them off on time, and you’re eventually going to get upgraded to an unsecured (traditional) credit card.

The important thing is to make sure you don’t get in over your head again. Use your credit for simple purchases like gas and groceries. Budget for these purchases and pay the card off every month. That’s going to start establishing a good payment history — the most important component of your credit score — as well as a favorable credit utilization ratio, or how much of your available credit you’re using.

Some might suggest that you get a friend or family member to add you as an authorized user on their card, but that can be dangerous. If you do happen to fall back into your old, reckless ways, you’re not just going to run into problems with your credit — you also risk damaging your closest relationships.

Once you get your credit back on an upward trajectory, what else can you do other than making payments on time and keeping your credit utilization low? Check your free credit reports regularly: If there’s an error or a problem on your credit report, it’s even more important to make sure that you get it removed sooner rather than later.

Now, some specific loans and credit lines have built-in waiting periods after you declare bankruptcy. You can’t get a car loan, for example, until after your debts have been discharged. Your interest rate will also be very high — so paying for a car in cash is a better option. Conventional mortgages require a four-year wait after bankruptcy, but you can get an FHA loan after two years.

Other than that, it’s just a waiting game. But as we said above, the older data points on your credit report are less important than the newer ones, and keep growing less relevant each month.

You may regret the behaviors that brought you to file for bankruptcy, but do all the things you wish you’d done with your old credit life, and your credit will be on its way to repair. It might take between seven and 10 years for the bankruptcy to drop off of your credit report entirely, but you can still get some upward motion behind your score long before then.

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