How Can You Repair Your Credit After Bankruptcy?

Kelly Hernandez
A bankruptcy accountant sitting at a desk with files and papers.

If you’re dealing with a bankruptcy, you’re not alone. In 2019, 774,940 bankruptcy cases were filed in the U.S. court system. Credit card and loan debt can easily snowball into uncontrollable amounts, even if you consider yourself financially responsible. Unexpected expenses, such as medical treatments or car repairs, may send you spiraling into debt, which can quickly force you into bankruptcy.

Whether you’re in the process of bankruptcy or you’re currently suffering from the repercussions of a completed bankruptcy, such as a low credit score, you have options. By understanding how to recover quickly from your bankruptcy and how to change your financial habits so you don’t repeat it, you can get back on track toward reaching your goals.

Table of Contents

Bankruptcy’s Impact on Your Credit

Bankruptcy negatively affects your credit score. The severity of this effect depends on your current credit score range, which may be one of the following:

  • Very poor: A very poor score is between 300 and 579. You’ll have trouble getting approved for loans or credit by most lenders.
  • Fair: If your score is between 580 and 669, you have fair credit. Lenders might offer you credit but the terms may not be favorable.
  • Good: A good credit score is between 670 and 739. With this score, you shouldn’t have trouble finding a lender but the loan terms still may not be satisfactory.
  • Very good: You have very good credit if your score is between 740 and 799. You’re an attractive borrower to lenders so you’ll see better loan offers and terms.
  • Exceptional: An exceptional credit score is between 800 and 850. With this score, you’ll get the best rates and loan terms, as well as the highest loan amounts and credit limits.

When a bankruptcy appears on your credit report, you may see your score drop by as much as 200 points. You’ll see a more dramatic effect if you have good or exceptional credit. Your score will fall much more because you’ve broken your track record of financial responsibility.

The huge drop in your credit score associated with a bankruptcy makes you a riskier borrower. With this low score, you may have more problems applying for credit cards or loans. If you’re approved, the terms may be unsatisfactory, with high interest rates and low loan amounts.

How Long Does Bankruptcy Stay on Your Credit Report?

The amount of time it takes for a bankruptcy to eventually drop from your credit history depends on the type of bankruptcy you filed for. If you completed a Chapter 11 or 7 bankruptcy, expect to see it on your report for 10 years.

A Chapter 13 bankruptcy should only stay on your report for up to seven years. The more time that passes after the completion of your bankruptcy, the easier it is to rebuild your credit score.

Rebuilding Credit After Bankruptcy

When you decided to file for bankruptcy, you may have weighed the pros and cons of its effect on your credit score. However, there are strategies you can implement to help you repair your credit after a bankruptcy.

Check Your Credit Reports & Report Errors

It’s important to check your credit report regularly from one of the three main credit bureaus, Experian, Transunion, or Equifax. There are many credit report errors that can occur due to identity theft, fraud, or simple errors, including the following:

  • A higher credit utilization ratio than you should have.
  • Erroneous open credit or loan accounts in your name.
  • Negative marks, such as late payments or bankruptcies, that should already have dropped from your history.

Report errors to the credit bureau immediately so they can be investigated. If your personal information, such as your Social Security number, was compromised, your credit score may be negatively affected. By reviewing your report frequently, you’ll be able to identify erroneous activity quickly.

Make Regular Payments

It’s important to keep your accounts current and make regular payments. Late or skipped payments show up on your credit report and can also work to drag your score down lower after a bankruptcy. Consistent and on-time payments will increase your credit score and the amount of good credit history you have on your report over time.

Explore Credit-Builder Loans

A credit builder loan is a small loan a lender provides to a consumer with the specific purpose of building credit. Even if you don’t need a loan, it may be a good idea to look into qualifying for a small credit-builder loan. If you make your payments on time throughout the life of the loan, it can help you build your credit much faster after a bankruptcy.

How to Avoid Bankruptcy in the Future

If you want to avoid dealing with another bankruptcy, you must pay attention to your financial health and develop responsible spending habits.

Create a Budget

A realistic personal budget is crucial for staying on track financially. Your budget should prioritize the debts and monthly payments you owe so you can ensure you’re building positive credit history. By sticking to a strict budget, you can avoid bankruptcy and show you’re a responsible borrower.

Avoiding “Debt Spirals”

In many cases, the cause of a bankruptcy is attributed to a debt spiral. This occurs when you go into debt, can’t pay off the balance each month, and the interest that accrues continues to increase your debt balance. Before you know it, your debt has snowballed and is so large, it feels impossible to pay off.

This is usually when consumers turn to bankruptcy so their debts can be forgiven. You can avoid a debt spiral by paying off your credit card balances each month or at least by making more than the minimum payment.

Bankruptcy-Friendly Credit Cards

If you’re recovering from bankruptcy, applying for a bankruptcy-friendly credit card is a great way to begin repairing your credit. If you’re just getting back on your feet, it’s important to apply for a credit card with a low credit limit and low interest rate. Try to pay off your credit card balance each month to rebuild your positive payment history.

When shopping for a credit card, pay attention to the card’s:

  • Payment options.
  • Credit limit.
  • Interest rate.
  • Late penalty fees.

After bankruptcy, your credit score suffers and it might take a long time before you begin to see positive changes. You can increase your score faster by developing responsible financial habits, sticking to a budget, and using bankruptcy-friendly credit cards and loans.

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