How to Rebuild Credit After Bankruptcy

A bankruptcy gives you the relief of a clean financial slate — but also the worry that you’ll never have decent credit again.

Although a bankruptcy stays on your credit reports for up to 10 years, its impact on your score will fade with time. In fact, your credit score after bankruptcy may not be as bad as you think. You may actually have a higher credit score a year after bankruptcy than before filing because you stop fighting an impossible battle and begin rebuilding.

If you were eligible to file for bankruptcy, whether it was Chapter 7 bankruptcy, the most common kind, or Chapter 13 bankruptcy, your credit may have already been in tatters. But you can begin to restore your credit right away by offsetting the negative information on your credit report with something more positive.

Steps to rebuilding credit after bankruptcy

You might think you’re a pariah in the eyes of lenders and credit card issuers, but that’s not quite true. You’ll have to prove yourself, of course, but it can be done.

Although your goal — building a good credit score — is the same as that of someone starting from scratch, your situation is different. Your problem isn’t that creditors don’t know anything about you, but rather that they know a lot. Here's how to start rebuilding your credit after bankruptcy:

1. Check your credit reports

You can check your reports weekly for free on AnnualCreditReport.com. Your credit scores are calculated using information in your credit reports, so any inaccurate negative information can make it even harder for you to dig out of debt. If you find mistakes, dispute credit report errors and get them corrected.

Of course, there will be negative information that is accurate. Bankruptcy wipes out or reorganizes debts, but it doesn’t wipe your credit reports clean. Your reports will show a Chapter 7 bankruptcy for 10 years, or a Chapter 13 for 7 years. Late payments and debts that go to collection also remain on the reports until seven years after the delinquencies. You'll just need to wait for that information to age off of your reports.

2. Check your credit score

It’s smart to track your credit score month to month, and it’s crucial to look at the same score each time — otherwise, you’ll get a not-useful apples-to-oranges comparison. Pick one type of score to track and stick with it.

3. Seek a credit product for your situation

Your pre-bankruptcy payment history will make you look like an extremely risky borrower to lenders. You can fix that problem by providing extra assurances that they won’t lose money by lending to you.

Here are some credit products designed to do that as well as other ways to improve your financial profile:

Get a secured loan or credit-builder loan: This comes in two varieties, and most often is offered by credit unions or community banks. One kind of secured loan involves borrowing against money you already have on deposit. You won’t be able to access that money while you’re paying off your loan. The other kind can be made without cash upfront, though the money loaned to you is placed in a savings account and released to you only after you have made the necessary payments. In return, the financial institution agrees to send a report about your payment history to the credit bureaus.

Get a secured credit card: This kind of card is backed by a deposit you pay, and the credit limit typically is the amount you have on deposit. A secured card often has annual fees and may carry high interest rates, but you shouldn’t need it for the long term. It can be used to mend your credit until you become eligible for a better, unsecured card.

Be aware that you can be rejected for a secured card. Read the requirements carefully; you’ll want to be almost certain you can get approved before you apply for one, because each credit inquiry can cause a small, temporary drop in your score. This decline will be more than offset if you get a card, use it lightly, and pay the debt on time.

Ask someone to co-sign a credit card or loan application: This can help your score, but you need to have a friend or family member with good credit history who is willing to co-sign for you. It’s a big ask: A co-signer is risking his or her credit reputation for you, will be on the hook for the full amount if you don’t pay, and may face limits on personal borrowing because of the additional debt obligation. A co-signed card or loan can damage relationships if you don’t pay as agreed.

Ask to become an authorized user: If asking someone to co-sign is too much, you could instead ask to be an authorized user on that person’s credit card. But make sure the credit card will report payment activity by authorized users to the credit bureaus, or it won’t help build your score.

This route won’t lift a score by nearly as much as the other methods, because authorized users don’t have ultimate responsibility for repaying debt. (It is much more likely to help someone who has a “thin file” with little credit information in it than someone who has a file chock-full of negative information.) But this path won’t hurt, so you may want to pursue it.

Rebuilding your finances after bankruptcy

After bankruptcy, potential lenders would like to see that you have enough income to pay your current obligations, and have a little left over. A lighter debt burden makes you a more attractive borrower.

Here’s how to stay on top of your debt:

Create a budget. The pre-discharge credit counseling you went through before finishing your bankruptcy should have provided information on budgeting, but if not, don’t hesitate to seek help from a credit counseling agency. All nonprofit credit counseling agencies offer free basic consumer help on topics such as budgeting.

Begin building an emergency fund. Research by the Urban Institute shows that having as little as $250 in savings for an unexpected expense can protect families from resorting to high-cost loans or running up credit cards, which can start a new debt spiral. Any money you tuck away in a fund now can help you tackle those unexpected expenses.

Practice good credit habits. Once you get a lender to extend credit, be vigilant about paying on time. Keep your credit card balances low relative to card limits — less than 30% is typically advised, but less than 10% is even better. (You can check to see how much available credit you are using by viewing your credit score profile from NerdWallet.)