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Bankruptcy is one of the most difficult financial situations to experience. In addition to the financial stress leading up to it, bankruptcy remains on your credit report for seven years if you file for Chapter 13 bankruptcy or 10 years for Chapter 7 bankruptcy.
But there is a way forward. If you have a clear game plan, there's much you can do to recover from bankruptcy and rebuild your credit within a few years of filing.
Here's how to begin rebuilding your credit and financial fitness after bankruptcy.
1. Gather Your Bankruptcy Paperwork
After your debts have been discharged in bankruptcy, take the time to gather all the paperwork you submitted to and received from the bankruptcy court and store it in a safe place. You'll likely have to provide some of these documents to lenders when you want to apply for new loans, such as a mortgage or car loan.
When you file for bankruptcy, you'll complete a bankruptcy petition, or application, and several other forms for the bankruptcy court detailing your assets, debts, income and expenses. If you file Chapter 13 bankruptcy, you'll also create a repayment plan to bring your debts current.
When the process is over, you'll get an order of discharge paperwork from the court. Throughout it all, you'll have letters and emails from the court and your lawyer that you should also print out and file away.
Tip: Bankruptcy will damage your credit, but it's possible to get a loan or credit card again. Have all your documents handy so you can show them to lenders who request them while evaluating your applications for credit.
Learn more: Bankruptcy: How It Works, Types and Consequences
2. Review Your Finances and Create a Budget
To move forward from bankruptcy and avoid financial strain in the future, it's crucial to avoid taking on new debt. As a first step, make a budget, which can help you identify areas where you may be overspending and brainstorm ways to reduce expenses and increase income.
There is a type of budget to match every lifestyle and personality. Here are a few options:
- "No-budget" budget: If you don't want to do any expense tracking at all, you can choose the no-budget budget, where you decide on a certain amount to save toward various goals each month and then simply put the rest left in your checking account toward your other expenses—without overdrawing it.
- Zero-based budget: If you like the idea of getting granular and putting effort into your finances, the zero-based budget requires you to assign every dollar you earn to an expense category. You'll then spend only up to your expected net income, which involves closely planning and monitoring your spending.
- 50/30/20 budget: The 50/30/20 budget falls in the middle of these two extremes. It recommends spending 50% or less of your net income on necessities, no more than 30% on wants, and at least 20% on savings and debt payments over the minimum required. You'll have to divide your expenses into these three categories, but beyond that, you won't need to do much maintenance, and you'll be likely to both spend less and work toward short- and long-term savings goals.
Learn more: Types of Budget Plans to Know About
3. Start Building an Emergency Fund
The most important savings goal of all, particularly after filing for bankruptcy, is building an emergency fund. This is cash set aside so you don't need to rely on credit cards or loans to pay for unexpected expenses like medical bills or emergency home repairs. An emergency fund gives you the security of knowing you can handle financial setbacks without going into debt, and potentially tarnishing your credit, again.
To set up an emergency fund, start with a manageable goal, like $500. Make automatic transfers from your checking account to a savings account each month until you get there. Then work toward saving three to six months' worth of basic expenses, like housing, groceries, utilities and child care, so you're protected in case of a crisis like job loss.
Learn more: Steps to Build an Emergency Fund
4. Check Your Credit Report for Accuracy
Next, check your credit report to make sure the status of your bankruptcy filing, and the accounts that were discharged, are noted accurately.
When you file for bankruptcy, a notation will be added to the Public Records section of your credit report. The credit accounts included in the bankruptcy will also be listed on your credit report; upon discharge, they should be recorded as "discharged," with the balance at $0.
When debts are discharged, that means you're no longer legally responsible for paying them, and creditors cannot collect on the debt. For Chapter 7 bankruptcy cases, discharge usually happens four months after the initial filing; for Chapter 13 cases, about four years afterward.
Starting one or two months following the discharge, make sure each of your accounts appears accurately on your credit report. You have the right to dispute any information on your credit report you feel is inaccurate or hasn't been updated.
Learn more: How Credit Report Disputes Affect Your Credit
5. Work on Rebuilding Your Credit
Even though bankruptcy typically has a significant negative effect on your credit, starting from a clean slate gives you the chance to repair your credit. To do so, try these strategies:
- Consider a credit-builder loan. Credit-builder loans from credit unions or community banks are designed to help people establish or rebuild credit. The amount you borrow—typically no more than $1,000—is placed in a special savings account, where it earns interest but is inaccessible to you until the loan is paid in full. You make a fixed payment, with interest, each month for a set period ranging from six to 24 months, after which the funds are yours. Some credit unions also let you keep some or all of your interest payments. On-time payments toward the loan will appear as positive entries on your credit report, but be sure the lender reports payments to all three consumer credit bureaus (Experian, TransUnion and Equifax) for the most benefit.
- Get a secured credit card. Another credit-building product to consider is a secured credit card. To get one, you generally must put down a cash deposit, which becomes your borrowing limit. If you stop paying your bills, the lender can take the deposit. If you use the card sparingly, but use it every month and always pay off your balance in full, you'll establish a pattern of positive payments on your credit report.
- Consider credit card offers. After you've logged a year or two of timely payments via a credit-builder loan, a secured credit card or both, start watching your inbox and mailbox for unsecured credit card offers. The pickings may be slim: borrowing limits low, interest rates relatively high and fees less than ideal. But if you apply for and get a card, you can begin proving you can handle mainstream credit. As with a secured card, use your new card sparingly but regularly, and pay your bill in full each month to create a pattern of on-time payments.
- Monitor your credit over time. Get in the habit of checking your credit scores regularly so you can build an understanding of credit health and address any issues, such as high credit utilization, as soon as they arise.
Learn more: How to Build Credit: A Comprehensive Guide
6. Learn From the Past
You can make your bankruptcy a learning experience by reviewing your past missteps and taking care not to repeat them. Examine patterns of spending, borrowing and late or missed payments to better understand what led to bankruptcy, and how to adjust your habits to support greater financial security.
Consider working with a certified credit counselor to devise a realistic budget, set achievable money management goals and establish a long-term plan for rebuilding your credit. But beware credit repair scams that promise to help improve your credit immediately or remove negative information from your credit report. There are no quick fixes for bankruptcy. Rebuilding your credit after you've filed for bankruptcy takes time and patience. Many people have done it before, and you can too.
Learn more: How to Recover From Common Financial Mistakes
Frequently Asked Questions
How Long Does Bankruptcy Stay on Your Credit Report?
Chapter 7 bankruptcy stays on your credit report for 10 years from the date when you filed for bankruptcy protection. Chapter 13 bankruptcy remains for seven years from the filing date.
How Soon After Bankruptcy Can You Open New Lines of Credit?
The type of credit determines how soon you can access it after bankruptcy. You can typically apply for a secured credit card immediately after your debts have been discharged. You generally have to wait one to four years from the discharge date to get a mortgage, depending on the type of mortgage and type of bankruptcy filing. You can apply for a car loan after discharge for Chapter 7 bankruptcy, but you'll need permission from the court to get one during the three- to five-year repayment period for Chapter 13 bankruptcy.
The Bottom Line
It is absolutely possible to have a stable financial future after bankruptcy. If you follow these steps, and take care to avoid overwhelming debt or missed bill payments, you'll find that your credit scores will begin to improve, and you'll be able to get new credit again. By the time the bankruptcy automatically falls off your credit report after seven or 10 years, you may find yourself eligible for a wide range of credit, at reasonable rates, at last.
