How to build credit after a bankruptcy

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There’s no way around it: Bankruptcy will have a serious impact on your credit and ability to get new loans. It doesn’t have to be your credit’s death sentence, however.

In fact, if you take the right steps, your credit history could recover significantly in as little as 24 months and, over time, end up stronger than it was before.

Read on for our guide to how to repair and rebuild your credit after any type of bankruptcy.

Chapter 7 vs. Chapter 13: Does it make a difference when it comes to your credit?

Both Chapter 7 and Chapter 13 will affect your credit in significant ways, but there are important differences in how you can rebuild your credit afterwards.

Both types will knock off at least 150 points from your FICO credit score if your score is in the 600s or lower — and more than 200 points, if your credit was 700+ before you filed for bankruptcy.

However, the type of bankruptcy you file for does make a difference in how soon you can get new credit, which will be a necessary step in rebuilding your credit history.

To start, Chapter 7 — which essentially wipes out most debt including credit cards, medical bills and personal loans — usually takes between four to six months from filing to discharge. You could technically apply for new credit right after your case closes.

Chapter 13, on the other hand, works a bit differently. Because it takes three to five years to discharge, any requests for new credit during that time will need to be authorized by the court and/or bankruptcy trustee during that time. Once your bankruptcy has been successfully discharged, however, those restrictions are lifted.

Chapter 7 and Chapter 13 bankruptcies also differ significantly in one crucial aspect: how long they’ll be reflected in your credit report. Chapter 7 bankruptcies will be reported for a full 10 years. Chapter 13 will only be reported for seven.

Steps to rebuilding your credit after bankruptcy

Whether you filed for Chapter 7 or Chapter 13, the steps to rebuild your credit are essentially the same: keep a close eye on your credit report, pay your current bills on time and, when you’re able to, get new credit and manage it well.

Check your credit report (and keep checking it regularly)

Requesting your credit reports from all three bureaus — Equifax, TransUnion and Experian — is the first step to repairing your credit.

You can request your reports from AnnualCreditReport.org for free. Note that, despite the website’s name, you can actually obtain your reports weekly, thanks to policies passed during the pandemic. These free reports won’t show your FICO scores; if you’d like to know your score, you can buy reports directly from the credit bureaus and from a number of other sites.

You want to make sure that all reports reflect that debts have been discharged as a result of the bankruptcy proceedings. The debts eliminated or restructured by the bankruptcy should reflect an owed balance of $0, along with a note indicating that they were discharged.

Go over your report carefully, and if you find any mistakes — such as a debt being marked as “charged off” instead of being discharged due to bankruptcy — make sure to file a dispute with the credit bureaus.

Signing up for a credit monitoring service (some are free) could also help you track changes in your report and monitor your credit progress.

Pay your remaining bills on time

While bankruptcy will wipe out — or allow you to restructure — most of your debt obligations, there are still some payments that will remain. These can include:

Tax debt
Mortgages
Child support or alimony
Auto loans
Fines due to a criminal case

Because payment history is, by far, the most important factor in calculating credit scores, and a 30-day-late payment can bring your score down anywhere from 60 to 80 points, it’s essential to make these payments on or before the due date.

If you can’t make a payment, it’s important to talk to your creditors and attempt to work out a payment plan. In the case of student loans, for example, you might be able to obtain a lower monthly payment if you can demonstrate financial hardship. If your debt is tax-related, the IRS might also be able to work out a plan for you.

Apply for a credit-building loan or secured card

Getting new credit after a bankruptcy will not be easy; however, there are ways to do it.

Credit-builder loans are great tools to do just what the name implies. Note, however, that these types of loans function very differently from any other type of personal loan, and you will not receive an amount of money upfront once the loan is issued.

Instead, the amount you borrow will be placed in a savings account and you will make payments every month by an established due date. These payments are reported to the credit bureaus. Once you pay the entire amount off, you’ll gain access to the funds you borrowed and will have also established a solid track record of timely payments.

Another alternative is a secured credit card. Secured cards work much like traditional credit cards, but require collateral, usually in the form of a security deposit. You’ll pay this deposit up front and it will typically — but not always — serve as the credit limit you’re allowed to use.

These cards also report your payments to all three major credit bureaus, helping you create a solid history of timely payments.

Lastly, you could also apply for a personal loan with a co-signer (provided the co-signer has a good credit score); however, you’ll have better odds of approval if you wait a couple of years after filing for bankruptcy. When it comes to your credit score, the most recent information is most important. As time passes, and you build a better payment history, the bankruptcy’s effect on your score will lessen.

Additionally, as we said above, if you filed for Chapter 13 and you’re still in the process of paying back the restructured debt, you’ll have to ask for authorization from the court and/or your trustee in order to obtain new credit. To be approved, you’ll need to show the credit you’re applying for is necessary and that paying for it will not interfere with your court-mandated repayment plan.

Once your bankruptcy has been completely discharged, however, you’ll be free to obtain new credit without prior approval.

Become an authorized user

If a family member or close friend has a credit card and is willing to add you as an authorized user, this could be a good way of building your credit back up. A consistent payment history will be reported on both the main borrower’s history and yours. However, it’s important to make sure that payments on this card are being made on time by both you and the main cardholder or you both risk damage to your credit.
How to Build Your Credit after Bankruptcy FAQ
How long does a bankruptcy stay on your credit report?
The length of time a bankruptcy stays on your credit report depends on the type. Chapter 7 bankruptcies will be reflected on your credit report for 10 years; Chapter 13, on the other hand, should drop off from your report after 7 years.
What happens to your credit when you file for bankruptcy?
Bankruptcy will seriously impact your credit score. According to FICO, depending on your current score, it could be reduced by anywhere between 100 to 240 points. Your credit can recover, however — make sure to check out our guide to find out how.
How long after filing bankruptcy can you get a credit card?
You can get a credit card as soon as your bankruptcy is officially discharged; however, you’ll have a hard time getting approved by most lenders. If you’d like to use a card to build your credit back up, a secured credit card — which requires a security deposit and has a low credit limit — could be your best option.