Bankruptcy can bring enormous relief to individuals struggling with overwhelming debt. Nonetheless, many bankruptcy petitioners worry about the impact of the filing on their credit score and wonder how long it will take to rebuild credit after the filing. You may be surprised to know that it might not take as long as you think. Here's what you need to know.
Bankruptcy and Your Credit Report
The bankruptcy record will remain on your credit report for seven or ten years, depending on the chapter bankruptcy you filed. In a Chapter 13 “debt reorganization” bankruptcy, it remains on your credit report for seven years from the filing. In a Chapter 7 “liquidation” bankruptcy, it remains on your credit report for ten years after filing.
Although having a record of bankruptcy on your credit report makes it more challenging to obtain a line of credit, whether a loan or a credit card, it's not impossible. You can begin rebuilding your credit immediately after the bankruptcy filing. If you are diligent with your money and demonstrate to lenders that you are a low default risk, you may be able to obtain a loan in as little as 18 to 24 months.
Rebuilding Credit after Bankruptcy
The fastest way to rebuild credit after bankruptcy is making timely payments on any remaining or new debt. Although your credit score decreases after bankruptcy, if you repay your subsequent debts on time, it will begin to rise quickly. Your payment history makes up 35 percent of your FICO score, while the amount owed makes up 30 percent. So, focus on proving that you can handle repaying any existing credit.
You should also build an emergency reserve fund. The reorganization or discharge of your debt should free up enough income to start setting aside a percentage of it every month. Having a healthy savings account will allow you to continue making regular credit repayments and rebuilding your credit score, even if your income dips temporarily or you experience another financial setback. You can also use part of the savings for a down payment on a car or a house mortgage, which means you won't have to seek as much credit, giving confidence to a potential lender.
As you rebuild your credit, don't forget to keep a close eye on your credit report. Make sure that there are no inaccuracies or errors that would keep your credit score low. If you stick to these practices, you can reclaim your original credit score–or attain an even higher one–before you know it.