How to Improve Credit Score After Bankruptcy

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There’s a certain stigma that goes along with filing bankruptcy and the negative impact is something that’s felt long after your case is discharged. There is, however, a silver lining since bankruptcy can provide you with a fresh financial start but it’s important to make sure you’re using the opportunity wisely.

Aside from keeping your spending in check and learning to live on a budget, helping your credit score to recover should be at the top of your to-do list after bankruptcy. While you won’t be able to see your score bounce back right away, taking some proactive steps can put you back on the road to good credit in less time than you think.

How bankruptcy impacts your credit score

The main question people tend to ask when filing bankruptcy is what will my credit score be afterwards? (If it’s been a while since you last checked your score, you can check your credit score for free on Credit Sesame.)

When negative marks appear on your credit report in connection with a debt, it has a direct effect on your score and bankruptcy is no different. The question of how many points you stand to lose largely depends on how high your score was to begin with.

Consider this scenario

After getting in over his head with credit cards, Mark decides to file Chapter 7 bankruptcy to wipe out his unsecured debts. Prior to filing bankruptcy, his credit score was 680. According to FICO, once he comes out of bankruptcy, he can expect to see his score drop by anywhere from 130 to 150 points. That puts him in the 530 to 550 range, which will likely make it difficult to qualify for even the highest interest loans.

On the other hand, Sarah is a struggling homeowner who’s having difficulty keeping up with her mortgage payments because of old medical bills. In an effort to hang on to the home, she decides to file Chapter 13 bankruptcy, which allows her time to catch up on outstanding payments and avoid foreclosure. She’s managed to keep her credit score around the 780 mark but according to FICO, her score will take a hit of 220 to 240 points after the bankruptcy.

Both of our debtors ended up in roughly the same score range after the fact but Sarah, whose score was higher, was penalized more. So why is that?

As a general rule, someone that previously had near perfect credit and a high score can expect a much bigger drop in their credit score as opposed to someone that already had negative items on their credit report. Let’s assume that Mark’s lower credit score was attributed to one or two late payments on one of his accounts. Because he already appears to be a high-risk borrower, his score doesn’t have as far to fall.

Additionally, the more accounts that are included in the bankruptcy case can have a bigger impact on your credit score. In Sarah’s case, she had a single mortgage debt and several unpaid medical bills, as well as a couple of credit cards. With negative marks showing up on multiple accounts, her score was more vulnerable in terms of losing points.

Bottom line, bankruptcy isn’t a one-size-fits-all proposition and your entire credit profile plays a huge role in how much your credit score is affected.

How long does bankruptcy hurt your credit?

When it comes to bankruptcy, there are two main types you can choose from. Chapter 7, also known as liquidation bankruptcy, allows you to eliminate an unlimited amount of unsecured debt. The process is relatively quick, usually taking 3 to 6 months.

In a Chapter 13 bankruptcy, you agree to make payments on any debts you include in your filing over a 3 to 5-year period. While there’s a limit on how much debt you can include in a Chapter 13 filing, you don’t have to surrender any of your assets, which is a requirement of Chapter 7.

Even though the two are vastly different, both options affect your credit score in similar ways. However, it’s possible that a potential creditor will view one type more favorably than the other when you’re trying to get new credit after bankruptcy. In a Chapter 13 situation, lenders may be more willing to give you credit if you can show that you’re making your debt payments on time.

In terms of the long-term impact, Chapter 13 can linger on your credit for 7 years while a Chapter 7 filing can stick around for 10 years. As long as a bankruptcy appears on your report it will negatively affect your credit score but the effect is lessened over time.

Let’s go back to our hypothetical debtors. In Mark’s case, he went into the bankruptcy with a lower score but according to FICO, it should take him less than 5 years to get his score back to where it was pre-filing. For Sarah, regaining lost points is going to take longer and it may be closer to 7 years before she sees her score reach pre-bankruptcy levels. In short, the bigger the drop, the slower the recovery.

How to raise your score after a bankruptcy filing

Now that you know how bankruptcy affects your credit score to begin with the next step is figuring out what to do about it. It’s important to note here that there is no one best way to improve a credit score after bankruptcy. As we just mentioned, it takes years for credit scores to get back to their original starting point.

Nonetheless, there some things you can do to work on improving your score after filing for bankruptcy. Here are the most important action steps you need to take after a bankruptcy:

Check your credit report for errors and inaccuracies. Make sure that your credit reports have correctly labelled your pre-bankruptcy debt as “included in BK”. If a debt you included in the bankruptcy is not being reported properly, contact the credit bureau reporting the information to initiate a dispute and have the information corrected.

Stay focused on your finances. Be responsible with your spending, keep your employment stable, and pay all your bills in full and on time. Payment history accounts for 35% of your credit score and re-establishing a positive payment timeline is the best way to strengthen your credit history. If you need help staying on top of your bills, setting up automatic payment reminders through your bank or a budgeting app like Mint can make it easier to keep track of due dates.

Apply for a secured credit card. Secured cards require a cash deposit and offer lower credit limits than unsecured cards but they can be a useful tool for rebuilding credit. Just make sure you keep your spending in moderation and pay in full and on time each month to get the most benefit for your score.

Take a close look at the interest rate and fees before committing to a secured card, since they tend to be more expensive than traditional cards.

The bottom line

Regardless of which chapter you file for, there’s no doubt that going bankrupt will impact your credit score in a negative way. The best thing you can do once it’s over is focus on fixing your credit score. This is where knowing what can help or hurt your credit and practicing good financial habits comes in handy. Eventually, the bankruptcy will be “purged” from your credit report summary and your poor score will hopefully become a distant memory.

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