How Does a Bankruptcy Affect my Credit Score?
If you’ve been doing a great job making payments on your debts, bankruptcy will have a significant impact on your credit score in the short term. However, by the time you start thinking seriously about bankruptcy you’ve probably either started missing payments or are on the verge of doing so. If that’s the case, the bankruptcy will help you turn things around per a recent piece in the Los Angeles Times:
Filing for bankruptcy may have actually helped your scores. Researchers at the Federal Reserve Bank of Philadelphia found scores typically plunged in the 18 months before people filed for bankruptcy and rose steadily afterward. The average credit score before someone filed Chapter 7 was 538.2 on Equifax’s 280-to-850 scoring range. By the time filers’ cases were discharged, their average score was 620.3.
How Long Does Bankruptcy Stay on my Credit Report?
According to Experian:
- Chapter 7 bankruptcy will remain on your credit report for 10 years from the filing date.
- Chapter 13 bankruptcy will cycle off your credit report in 7 years after the filing date.
Will I be Able to Get Credit After Bankruptcy?
Absolutely. My clients frequently report that within days of their bankruptcy being filed their mailboxes are filled with offers for vehicle financing, credit cards, and other loans. They’re not great offers, though. Interest rates, annual fees, and other costs of credit will be very high until you can start to rebuild your credit.
Can I Buy a Home After Bankruptcy?
If you’ve rebuilt your credit, you can buy a home between one and four years after your bankruptcy discharge, depending on the type of loan (VA, FHA, conventional, etc.). See this chart by mortgage banker James Spray for more specifics.
How do I Rebuild my Credit Score After Bankruptcy?
While the old saying time heals all wounds may or may not be the case with respect to a broken heart, it is central to credit repair after bankruptcy. Again from Equifax, while the bankruptcy shows up on your credit report for years,
as time goes by and you begin to reestablish your credit, the bankruptcy notations will begin to affect you less and less until they are purged automatically from the report.
You shouldn’t just sit around waiting for the bankruptcy to drop off the credit report, though. There are several steps you should take after your case is filed to rebuild your credit score:
- Review your credit report and file disputes where the bankruptcy isn’t being reported properly. You can get your free credit reports once a year at annualcreditreport.com.
- Get and use a secured credit card. A secured card is one where you put down a deposit and the lender gives you a card in the same amount. Don’t ever max it out, and pay it down completely each month.
- Consider reaffirming a vehicle loan so that payments continue to report to the credit bureaus.
- Get a credit-builder loan.
You apply for the loan, whether you have bad credit or no credit, and you are approved, but there’s a safety net for the lender. The money you borrow is deposited in a savings account — one that you cannot access until you have fully repaid the loan. If you pay the loan as agreed, the financial institution promises to send a good report to the credit bureaus. A 2013 study showed an average improvement of 35 points with six months of on-time payments for loans as small as $100.