How Bankruptcy Affects Your Credit and How to Build Your Credit Afterwards

FT Contributor
A woman calculating her credit score after filing for bankruptcy.

When you file for bankruptcy with the federal court system, you’re officially claiming you cannot pay back the debt you’ve accrued. Depending on the type of bankruptcy you file, the court may have you liquidate assets to pay creditors or agree to a repayment plan. You can declare one of the following types of bankruptcy:

  • Chapter 7: Requires the liquidation of assets to settle debt.
  • Chapter 13: Helps set up a repayment plan to protect you from creditors and to settle debt.
  • Chapter 12: Bankruptcy declared by family farmers.
  • Chapter 15: Type of bankruptcy declared in foreign cases.
  • Chapter 11: Bankruptcy that results in the reorganization of a corporation or business.

Chapter 7 and 13 are the most common forms of bankruptcy filed by consumers in the U.S.

Table of Contents

How Long Does Bankruptcy Stay On Your Credit Report?

The length of time a bankruptcy stays on your credit report is determined by the type of bankruptcy that was filed. The most common types of bankruptcy filed by individuals can stay on your credit report for up to 10 years. 

Chapter 7 Bankruptcy

A Chapter 7 bankruptcy will stay on your credit report for 10 years. The older a bankruptcy is on your report, the less it has a negative effect on your credit score. A Chapter 7 bankruptcy will remain reported for 10 years, regardless of your credit score.

Chapter 13 Bankruptcy

After you’ve completed a Chapter 13 bankruptcy, it will remain on your credit report for seven years from the filing date. If you fail to make consistent and on-time payments to the repayment plan set up in court, you can experience more negative effects to your credit score.

Can You Remove Bankruptcy From Your Credit Report Early?

There are methods you can use to potentially remove a bankruptcy from your credit report early. However, these methods are arduous and time-consuming, and not 100% effective. To remove your bankruptcy from your credit report early, you can try to:

  • Check your credit report for bankruptcy errors: Review reports from all credit bureaus to ensure they match.
  • Dispute credit inaccuracies: Analyze each debt on your report and dispute it with the bureau if it’s inaccurate.
  • Send a procedural letter to the credit bureaus: Send letters to the credit bureaus asking them where your bankruptcy was verified. If the bureau can’t prove the bankruptcy was verified, you can dispute it. 
  • Ask the court how the bankruptcy was verified: If the bureau specified your bankruptcy was verified by the court, contact the court they list to ask how it was verified. If the court discovers problems in their verification process, you may still be able to dispute. 
  • Hire a professional to remove the bankruptcy: For a fee, a professional may be able to navigate the dispute process for you.

Whether or not a dispute method will work to remove your bankruptcy early depends on your personal situation. Everyone has a different bankruptcy filing scenario, so you may not find success with any of these methods.

Will My Credit Score Increase When the Bankruptcy Is Off of My Credit Report?

When your bankruptcy drops off from your credit report, your credit score will increase. In addition to bankruptcies, your credit score is calculated using different variables, including your payment history, debt, and the length of your credit history. Therefore, it’s difficult to determine how much your credit score will increase after a bankruptcy drops.

Tips on Increasing Your Credit Score After Bankruptcy

Getting your bankruptcy discharged is only the first step in recovering from bankruptcy. Once your bankruptcy has fallen off your credit report, it’s important to focus on rebuilding your credit. 

In some cases, once your bankruptcy is discharged, your credit score will be based on what it was prior to filing for bankruptcy. In others, your repayments during bankruptcy can further decrease your score. 

Review Your Credit Report

If you have a low credit score, it’s tempting to simply ignore your credit report. However, it’s important to review the report thoroughly so you can learn where you need to improve. For example, if you see that your payment history is causing your score to remain low, you can make it a priority to pay your bills on time. By reviewing your credit score, you can create a plan of action to achieve the score you want. 

Pay Your Bills on Time

Many of your bills are also reported to the credit bureaus to be analyzed as your payment history, which is a crucial part of your credit score. It’s important to pay all bills on time, but the types of debts that can directly impact your credit score include:

  • Student loans;
  • Mortgages;
  • Auto loans;
  • Home equity loans;
  • Credit card payments;
  • Personal loans.

Make these bills your top priority and pay down these debts to see an improvement in your credit score after bankruptcy. 

Apply for a Line of Credit

The amount of credit history you have also directly affects your credit score. Applying for a credit card through a bank or store can help you build this credit history. However, be cautious when you apply for a line of credit. Applying for credit cards means companies will make hard inquiries on your account, too many of which can have a negative effect on your credit score. 

Spend Intentionally

When you’re beginning to re-establish your credit after a bankruptcy, it’s tempting to accept credit cards with high balance limits and begin to spend freely again. However, if you can’t afford to pay off your debts efficiently, this can lead you to another unfavorable situation with debt. 

By spending intentionally, such as dedicating your card to only gas payments or automated utility bills, you build a positive credit history without overstepping what you can comfortably keep up with. 

While bankruptcy negatively affects your credit and stays on your report for years, it’s possible to rebuild your report after bankruptcy. If you’re diligent with your budget and careful with your spending, you can improve your credit, even after filing for bankruptcy.

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