Declaring bankruptcy is seldom an easy choice. But when you’re facing financial hardship, filing for bankruptcy protection from creditors could provide you with some much-needed relief.
Of course, bankruptcy comes with downsides as well—one of the biggest being the damage bankruptcy can cause to your credit reports and credit scores. After you file for bankruptcy, it can be difficult to qualify for new financing in the future, like credit cards and loans. Yet if you work to rebuild your credit after bankruptcy, you could eventually put yourself in a better position.
The guide below is full of helpful tips on how to build your credit after bankruptcy. You’ll also find answers to common questions about how bankruptcy affects your credit, how long it takes to lift your credit score after filing for bankruptcy, and whether it’s possible to remove a bankruptcy record from your credit report altogether.
In general, filing for bankruptcy protection from your creditors affects your credit score in a negative way. Bankruptcy can also have a negative impact on your credit history. Yet the exact impact that bankruptcy may have on your credit can vary from one consumer to the next.
According to Experian, bankruptcy could trigger a credit score drop as severe as 200 points. For other consumers, the credit score impact of a new bankruptcy record could be far less significant.[1]
Any credit score changes you experience after filing bankruptcy will depend in large part on the previous makeup of your credit report. If you start with a mostly clean credit report (e.g., few negative items and a good credit score), then adding a bankruptcy could cause serious credit score damage.
On the other hand, if your credit report is already filled with negative information like late payments, collection accounts, charge offs, and perhaps a foreclosure or repossession, you likely already have a bad credit score. In this scenario, adding a bankruptcy to the mix might not trigger such a big drop in your credit score.[2]
How long bankruptcy stays on your credit report
Another downside of filing bankruptcy is the fact that the record has the potential to remain on your credit report for a significant period of time. The type of bankruptcy you file determines how long the item may stay on your credit.
Below are two of the most common types of bankruptcy and how long they can remain on your credit.
It is possible to rebuild your credit after bankruptcy. Yet it’s important to understand that a successful credit-rebuilding process requires patience and consistent effort.
As long as a bankruptcy record appears on your credit report (up to 7-10 years depending on the type of bankruptcy), it could have a negative impact on your credit score. On a positive note, the impact of an aging bankruptcy should decline as time passes.[4]
A recent bankruptcy filing typically causes more credit score damage than an older bankruptcy record. But you don’t have to wait until a bankruptcy record comes off your credit report to start the rebuilding process either. Even while a bankruptcy remains on your credit, you can take positive steps to try to offset some of the damage it may be causing.
If you’re looking to rebuild your credit after a bankruptcy, there’s no such thing as a quick fix. But the steps below could be a good starting point.
Whether you’re rebuilding your credit after a bankruptcy or building credit from scratch, one of the first steps you should take is to check your credit reports from all three credit bureaus—Equifax, TransUnion, and Experian. The good news is you can get free credit reports once a week from AnnualCreditReport.com.
As you review your three credit reports, it’s important to confirm that your credit history is accurate. Any accounts that were discharged in your bankruptcy should be reported as closed. Otherwise, your credit scores could be unfairly penalized.[5]
If you discover credit errors, you can and should dispute any inaccurate information with the appropriate credit bureaus. According to the Fair Credit Reporting Act (FCRA), you have the right to dispute inaccurate or incomplete information that appears on your credit report.[6]
Adding positive accounts to your credit report is another possible way to rebuild credit after a bankruptcy. Although new accounts won’t wipe out a bankruptcy record or any negative items you included in a bankruptcy, they might help offset some of the damage it caused.
It’s important to understand that some lenders and credit card issuers may not be comfortable loaning money to you with a bankruptcy on your credit report. Yet it’s typically possible to qualify for certain types of loans or credit cards even if you have filed for bankruptcy in the past.
If you want to establish new credit accounts after a bankruptcy, below are a few options to consider.
Developing smart financial and credit management habits is also essential if you want to build good credit after bankruptcy. Below are some tips that could help.
Depending on the type of bankruptcy you file, this type of negative record on your credit report could impact you for up to ten years. As long as a bankruptcy is on your credit report, it could hurt your credit score to some degree. But certain actions might help your credit score to lift along the way.
When your credit report updates to show that your bankruptcy is discharged, there’s a chance you might see a bump in your credit score according to Equifax. However, it’s important to note that every situation is different. With a Chapter 7 bankruptcy, the discharge process typically takes between four to six months. If you file a Chapter 13 bankruptcy, however, you won’t be eligible for discharge until you complete the repayment plan—usually around three to five years after filing.[3] [9]
Actions you take can also play a big role in determining how long it takes to rebuild your credit after bankruptcy. The sooner you begin to re-establish good credit, the sooner you should expect your credit score to start to recover. But if you have more credit setbacks after a bankruptcy like new late payments, collection accounts, or other negative items, then working to overcome bad credit could take longer.
The Fair Credit Reporting Act (FCRA) allows the credit bureaus to keep bankruptcy records on your credit reports for up to ten years. Yet the same federal law requires the credit bureaus to report accurate and verifiable information on your credit reports as well.
If you question or disagree with an item on your credit report—including a bankruptcy or an item included in a bankruptcy filing—you have the right to dispute it with any credit bureau. In your dispute, you can ask Equifax, TransUnion or Experian to correct or remove the inaccurate information from your credit report.
When you submit a dispute, the credit bureau must investigate your claim and remove or correct any incorrect information (typically within 30 days). But if a credit bureau determines that an item you dispute is accurate, it can verify the information and keep it on your credit report.[10]
Filing for bankruptcy protection from your creditors could provide you with relief if you’re in a desperate financial situation and don’t see another way out. But this solution may also have long-term credit consequences. So, it’s not a decision you should make without careful consideration.
If you do file bankruptcy, however, you shouldn’t feel like you can never build good credit again. While it may require hard work and patience, it is possible to start getting your credit back into better shape for the future.
Michelle Lambright Black is a nationally recognized credit expert with two decades of experience. She is the founder of CreditWriter.com, an online credit education resource and community that helps busy moms learn how to build good credit and a strong financial plan that they can leverage to their advantage. Michelle's work has been published thousands of times by FICO, Experian, Forbes, Bankrate, MarketWatch, Parents, U.S. News & World Report, and many other outlets. You can connect with Michelle on Twitter (@MichelleLBlack) and Instagram (@CreditWriter).
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