Credit Repair For Bankruptcies: How To Get Your Score Back to Respectable Levels

Making a choice to file for bankruptcy can be daunting, and doing so will severely reduce your credit score. Even though it may take some time, it is possible to repair your rating.

If you really focus and exercise perseverance, you can use the steps in this guide to gradually repair your credit and put your financial life back in order.

How does bankruptcy impact credit score? 

Your credit score gets significantly impacted if you file for bankruptcy. Based on the sort of bankruptcy you filed, it will appear in your credit report for 7 to 10 years.

If lenders review your public credit records, they will take into account this information. 

The bankruptcy and the debts get discharged only once the legal process is over. Therefore, lenders might only accept your application once the bankruptcy gets discharged. With that said, you may still need help getting approved for some loans and face high-interest rates and unfair terms. 

Statistics from VantageScore indicate that the average credit score after bankruptcy is 530. Generally, bankruptcy lowers an individual's credit score by 150 to 240 points.

So, what do I do? 

As we already established, the effects on your credit report last for seven or ten years, based on the kind of bankruptcy filed. Furthermore, the effects gradually diminish with things you do to improve your score. 

Here are some things you can do to mitigate some of the damage:

Check your score

Begin by becoming acquainted with your credit report when you're looking to rebuild your credit following bankruptcy. Experian, Equifax, and TransUnion provide a program that permits you to access your credit report weekly, free of charge, at AnnualCreditReport.com until December 31st, 2023.

It can be simple to implement specific changes when you have clarity on why your credit score is improving or decreasing while knowing the factors influencing it. Moreover, you can identify any mistakes damaging your score, including incorrect account details or erroneous public records.

It's crucial to routinely check your credit report since creditors can keep reporting unfavorable account information even after your bankruptcy gets discharged. So you may have to spend some money every few months, but it will be money well spent. Besides, you are eligible for one free credit report annually.

If you assess your credit report, you will be able to get your bankruptcy permanently erased after seven years for a Chapter 13 bankruptcy and ten years for a Chapter 7 bankruptcy.

Keep checking your score

The consequence of bankruptcy differs on an individual case basis, and the repercussions fade with time. But it will cause an immediate decline in your score, anywhere between 100 to 200 points or upwards. Monitoring your credit score every month is essential to restore it following bankruptcy. Set up a free online account with a business that offers score updates to users; many credit card companies have this option.

Examine your score to ensure these improvements are updated and accurate once accounts get discharged throughout the bankruptcy process.

Watch your credit score for potential signs of identity fraud or other problems to prevent further decline. There could be false account statuses, bogus loan applications, lawsuits, or actions you did not initiate. Even though improving your score could take time, routinely checking your credit score is a smart way to remain committed as you change your financial practices.

Send a dispute to the credit bureaus if your discharged debts still appear outstanding, and have them correct that information.

Introduce good credit-building habits

As the impact of your bankruptcy recedes, your credit score will rise, but to genuinely restore your credit after bankruptcy, you'll need to develop prudent budgetary practices. To begin, consider the following suggestions:

Pay off your bills consistently and on time:

Making your payments on time is crucial when restoring credit after bankruptcy because timely payments make approximately 35% of your FICO Score. Keep up with expenses, such as utilities, since these can help raise your score with the right solutions apart from making regular, on-time payments.

Use credit cards less frequently:

Among the main threats could be resuming the exact behaviors that got you into money troubles in the past. You can lessen the urge to splurge and decrease the possibility of this recurring by using credit cards less frequently or not using them at all.

Maintain a low credit balance:

Your FICO Score gets calculated using 30% of your outstanding balance. Therefore, maintaining modest credit balances is essential to repairing credit after bankruptcy. Plan to use cards less and make it a goal to knock off balances every month to achieve this.

Set up a nest egg:

To ensure that you have funds set aside for unforeseen expenses like home repairs, tax increases, or medical expenses, try to set aside money each month. It can support you in preventing further credit that could impede or even undo your efforts to enhance your credit.

Give it some time:

Once you file bankruptcy, your credit score can recover within two months or two years, depending on the borrower. Due to this, it's critical to establish sound credit habits and maintain them, even after your score has improved.

Credit building loans

Another approach to improve your credit without needing to get approved for a typical loan is through credit builder loans. You deposit into a secured savings account when you take out a credit builder loan. While you repay the loan's principal and interest, the lender maintains a set amount of money in the borrower's name in the account or certificate of deposit. The consumer credit bureaus receive a report on these payments. The money is released to you once the loan gets repaid. In smaller amounts, regional and community banks provide this type of loan.

You might also be able to get a secured loan when you borrow based on the funds in your savings account. With time, credit-builder loans can raise your credit score as the financial institution reports your repayment activities to the major credit bureaus.

With that said, the lender may run a hard credit pull if you request new credit lines. Your credit score can suffer for each credit inquiry made by a potential lender when you apply for new credit.

Becoming an authorized user

Improving your credit as an authorized user on anyone else's credit card is frequently more doable than obtaining a co-signer for a loan. Using a card in your name linked to another borrower's account rather than your own qualifies you as an authorized user. You won't need to meet the account requirements yourself. Still, you won't be able to make changes to the account, but you can purchase items using the card.

Your credit report will reflect credit card payments. As a result, your score increases when you make them regularly and maintain a low credit utilization rate. Just ensure that the credit card provider records approved user payments to the three major credit agencies to give yourself the best chance of raising your score. Even though this won't have as much impact as other strategies for raising credit scores, it might still be beneficial in the long run.

Co-signers

A co-signer can help you qualify if you are having trouble getting approved for a loan or an apartment lease after declaring bankruptcy. A co-signer guarantees repayment of a debt if you, the principal borrower, cannot. The co-signer will be liable for the unpaid loan sum if you default on your payments, even if they have no claim to the loan funds or the property funded. Similar to how your credit score would suffer if you skip payments or default, so will theirs.

Due to these factors, you must closely review whom you approach to represent as your co-signer and take it easy if they refuse. Encourage a family member or friend who is comfortable financially to act as a co-signer, then offer an exit strategy. Simply because someone can act as a co-signer, it doesn’t mean that they are willing to do so.

Secured credit cards

If you want to repair your credit after bankruptcy, you should use credit cards less frequently. But on the other hand, using secured credit cards wisely might also help reinstate your credibility with lenders.

To obtain a secured credit card, you must make a refundable security deposit, which must subsequently get used as collateral for loans. Despite having higher interest rates, these cards are an excellent strategy to show responsible credit habits if they report to the three credit bureaus. Then you can become eligible for a standard card with more favorable conditions.

Following frequent on-time payments, some secured cards even let you "transition" to an unsecured card. It’s helpful to bolster your credit, and you need not submit for a new, unsecured card.

Be mindful that requesting a secured card doesn't ensure approval, so spend some time learning about the provider's criteria before submitting your application. To avoid any damage to your credit score, pick a service that offers preapproval so you may determine if you're likely to be approved before submitting a hard credit check.

Credit repair agencies

There are many commercials for credit restoration businesses that claim to be able to wipe a bankruptcy from your record. Be skeptical of any company that promises bankruptcy removal. If the information in your bankruptcy report is accurate, these businesses cannot legally take any action on your behalf that you are not already able to do.

Think about adding to your emergency fund and reserves instead of paying a credit repair company with that money. Place your priority on altering the behaviors and events that contributed to your bankruptcy.

The relevance: Credit repair companies do the labor-intensive work for you while charging you a fee. You can save that money and apply it to keep repaying current loans if you're willing to verify your credit reports for inaccuracies and dispute them. Before researching credit repair companies, you should look at your spending plan and obtain duplicates of your financial report.

How long does it take to recover a credit score after bankruptcy?

The time it takes to repair your credit after declaring bankruptcy may be the most stressful part of the process. The kind of bankruptcy you face will determine the length of time it lingers on your credit report. What's more, it remains to be seen whether a borrower plays a significant part in the credit repair process by working to raise his score through intentional effort. Here are the two types of bankruptcy you should know about:

  • Chapter 7 bankruptcy:  
     A Chapter 7 bankruptcy remains recorded on the borrower's credit report for ten years. All bankruptcy-related information gets deleted from reports after ten years. Because the consumer's debt-to-income (DTI) ratio immediately lowers after filing for bankruptcy, the effect of bankruptcy on credit scores gradually lessens over time. DTI is your monthly income compared to your debt payments every month. As a result, you can show progress even one to two years after being discharged.
  • Chapter 13 bankruptcy: 

    A Chapter 13 bankruptcy only appears on a consumer's credit report for seven years, as opposed to ten years for a Chapter 7 bankruptcy. It tends to take somewhere around 12 to 18 months for the credit score to increase once your Chapter 13 bankruptcy gets discharged. After 18 months, many borrowers are eligible to refinance their restructured debt.

The Bottom Line

When you're feeling stressed or struggling to make your debt payments, declaring bankruptcy may be the financial reboot you require. But, filing for bankruptcy will lower your creditworthiness.

Among the simple and most efficient methods to begin is consistently making on-time payments on every active loan and credit card. You can also boost your credit score by minimizing risk when switching careers, maintaining a watchful eye on your credit report, and contesting any discrepancies.

About the author Greg Lorenzo

Greg is a financial expert who has been advising his audience on loans for over 10 years. He has a wealth of knowledge and experience in the area, and he is passionate about helping people get the best possible deal on their loans. Greg is an expert in negotiating loans, and he has a proven track record of getting his clients the best possible terms. He is also a strong advocate for financial literacy, and he regularly gives workshops and seminars on the topic.

Leave a Reply

Your email address will not be published. Required fields are marked

{"email":"Email address invalid","url":"Website address invalid","required":"Required field missing"}