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

FT Contributor  | 

When you file for bankruptcy with the federal court system, you’re 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.

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.

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. However, the 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. If you fail to make consistent and on-time payments to the repayment plan set up in court, you can experience more negative effects on your credit report.

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. 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 it wasn’t, 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 to ask how it was verified.
  • 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 works 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

Once your bankruptcy has fallen off your credit report, it’s important to focus on rebuilding your credit.

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. If your payment history is causing your score to remain low, make it a point to ensure you pay your bills on time. Create a plan of action to achieve the score you want, such as not taking out any more debt or opening a secured line of credit.

Pay Your Bills on Time

Focus on paying your bills on time so you can increase your score. Many of your bills are also reported to the credit bureaus to be analyzed as your payment history. It’s important to pay all bills on time, but the types of debts that can directly impact your credit score include:

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

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. Don’t apply for more credit than you can handle and be sure you trust yourself to pay off the balance so you don’t accumulate debt.

You may be best starting off with a secured line of credit. With this line of credit, you provide an asset as collateral when borrowing money. You’re tasked with paying back this debt, which can help you build solid and positive credit history.

Know What You Can Afford

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 hurt your credit score and won’t help you to raise your score while recovering from bankruptcy.

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


Image Source: https://depositphotos.com/

This post was updated January 2, 2020. It was originally published January 2, 2020.