Filing for bankruptcy is not something anyone plans to do, but there are circumstances where it is the only way forward. Thankfully, financial recovery after bankruptcy is possible. It may not be the easiest or straightest path, but it is doable when you are willing to put in the time and effort.
Rebuilding your credit after a bankruptcy filing may be intimidating, but there is a myriad of ways you can improve your credit report through new credit. Since bankruptcy is notorious for making it challenging to be approved for new credit, you might be wondering how soon you can get a credit card after bankruptcy.
There may be a few complications when applying for a credit card after bankruptcy. Still, you might be surprised by the stepping stones available to you from credit card companies for rebuilding credit. A bankruptcy filing, while undesirable, is set up for the possibility of complete financial recovery.
How Bankruptcy Works
Bankruptcy plays an essential role in the American economy. There must be a way for debts to be discharged when there is positively no way for them to be repaid in full according to the previously stipulated terms. While bankruptcy should be avoided to the best of your ability, there are times when it is the best possible option to move forward.
Bankruptcy offers a clean slate, whether through full discharge or debt settlement. How bankruptcy works depends on which chapter of bankruptcy one files. There are two types of bankruptcy individuals can file: Chapter 7 bankruptcy and Chapter 13 bankruptcy.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy is what most people think of when they think of bankruptcy. All the balances of what you owe from credit cards to loans with monthly installments, with exceptions, are fully discharged. The exceptions to full discharge are minimal and include alimony, child support, taxes, and student loans.
The discharging of your debts could include selling some of your assets, including property. After Chapter 7 bankruptcy is fully settled, all your debts will be fully discharged apart from the exceptions listed above.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy restructures your debt, settling it through a repayment plan over three to five years. Whatever is remaining through the restructuring process with be forgiven and discharged. This type of bankruptcy is a bit gentler on your credit report since you still pay a portion of your debt to your creditors.
Paying a portion of your debt through restructuring and a payment plan will enable you to hold onto your assets that might have otherwise been sold off through a Chapter 7 bankruptcy. Additionally, Chapter 13 bankruptcy falls off your credit report a few years sooner than Chapter 7.
How Filing for Bankruptcy Affects Your Credit
The three major credit bureaus that compile your credit reports are Transunion, Experian, and Equifax. Credit reports include personal details, account information, credit inquiries, collections, and public records. The three credit bureaus pull public records from state and county courts. These public records include foreclosures, repossessions, and personal bankruptcies.
Bankruptcy will show as a negative mark on all your credit reports that will impact how potential future lenders view you. A recent bankruptcy in your credit profile will cause many creditors, lenders, and landlords to decline your applications for loans, credit cards, and apartments. Those creditors who are willing to approve you may charge a higher interest rate and less favorable terms.
The potency of bankruptcy’s negative effect on your credit report will fade as time passes, and you will be able to eventually qualify for more favorable credit opportunities. If you put a solid effort into rebuilding credit after you file bankruptcy, your credit score will steadily increase, lessening the impact of the derogatory mark on your credit report.
How Long Does Bankruptcy Stay on Your Credit Report?
How long bankruptcy will remain on your credit reports depends on which chapter of bankruptcy you file. Chapter 7 bankruptcy will stay on your credit reports for ten years after the filing date. Chapter 13 bankruptcy will remain on your report up to seven years after you declared bankruptcy.
How Soon After Bankruptcy You Can Get a Credit Card
How soon you can get a credit card after bankruptcy is dependent upon a few factors. For some people, it can take a few years to qualify for traditional unsecured credit cards, while for others, it might not take quite as long.
You cannot apply for a credit card while the bankruptcy process is still underway. All filers must wait to open a new credit account until after the bankruptcy has settled and their debts have been discharged. For Chapter 7, your bankruptcy could be settled through court approval around four to six months after filing. For Chapter 13, the restructuring and payment plan for your debt could cause the settlement with court approval to take three to five years.
Once the bankruptcy has been settled, you are free to apply for a credit card, but that does not guarantee you will be approved. Let’s take a look at the different options you will have for a credit card after bankruptcy, and the time it might take to get approved:
One excellent option for rebuilding credit immediately after your bankruptcy is to become an authorized user on someone else’s credit card account. You can be added as an authorized user directly after your bankruptcy filing has been settled.
Becoming an authorized user on a friend, family member, or spouse’s credit card account will allow you to benefit from their positive payment history on your credit reports. To get the most out of this arrangement, you need to be sure that you can trust the credit card owner. If they begin making late payments or wracking up a high balance, adverse credit reporting will further harm your credit score.
However, suppose the person is trustworthy and responsible. In that case, the payment history on their credit card could rebuild credit substantially, so your credit score is high enough to apply for a credit card of your own that much faster.
Secured Credit Card
Secured credit cards are the perfect building block for returning to normal after bankruptcy. If you can’t yet get approved for unsecured credit cards, a secured credit card is an excellent opportunity to spruce up your payment history. A secured credit card requires you to put down a refundable security deposit that equals the credit limit.
In the most basic sense, a secured credit card is a way of borrowing your own money while benefiting from the account and every payment you make on it being reported to the credit bureaus who compile your credit reports.
Since you are putting down a security deposit that doubles as your credit limit, a secured credit card is usually very easy to be approved for. Secured credit cards, like credit-builder loans, were created for the purpose of credit score improvement.
After improving your credit enough through the secured card, you can apply for an unsecured card before closing the account and getting the security deposit on your secured card back.
Unsecured Credit Card
Directly after filing for bankruptcy, you will most likely have a poor credit score. Getting approval for a new credit card that isn’t secured with poor credit can be challenging. The difficulty in getting approved for typical credit cards is why most financial experts recommend taking time to build your credit history through a secured card or becoming an authorized user first.
Credit card issuers are more likely to consider your application to obtain credit more seriously if they can see proof of your efforts to recover from bankruptcy, like secured cards on your credit report. A credit card issuer may write off your application immediately if they see you are attempting to obtain a credit card directly after your discharge with no other credit-building attempts.
If you find a credit card issuer to approve you soon after bankruptcy, your credit limit will likely be small, and you may be charged high-interest rates. In some instances, patience through using secured cards may be the better option to save on costs.
Other Options for Building Credit After Bankruptcy
It is vital to keep in mind that there are plenty of other ways to build credit outside of credit cards. Improving your bad credit so a card issuer will look at your applications more favorably should be a holistic task.
You ought to work to improve your overall financial health through responsible spending. We recommend saving up for an emergency fund so that if you ever hit financial trouble, you can avoid relying on credit card debt to get you through.
Here are a couple of other actions you can take to raise your FICO credit score without applying for credit cards directly after bankruptcy:
An excellent way to improve your credit history is through a credit-builder loan. Credit-builder loans function similarly to secured cards. Rather than receiving a loan that you later payback, a loan to build credit works differently.
A financial institution, like a bank or credit union, sets up a closed savings account with the amount of the loan. You make fixed monthly payments to improve your credit history until the loan amount is reached. After the payments have been all taken care of, you will have access to the funds in the particular savings account.
On-time Payments on Your Student Loans
One of the key exceptions to the discharging of debts with bankruptcy is student loans. If you have student loans, making on-time payments on them each and every month is an excellent way to improve bad credit and payments history.
If your student loan payments aren’t affordable, you can apply for an income-based repayment plan, allowing you to make your payments on time for improved credit without breaking the bank.
Check Your Credit Regularly
To ensure your credit scores are in good shape, we recommend you do a credit check on your own report regularly. By doing a credit check often, you can more easily catch identity theft and inaccuracies that might harm your credit scores.
If you catch issues in your credit check quickly, you can dispute them with the credit bureaus before they have a chance to further damage your credit.
Pay off Balances Monthly on New Credit
When you do start being approved for new credit cards again, be sure you take good care to handle your credit card debt responsibly. Getting approved for that initial credit line might be nerve-wracking as you don’t want to make the same mistakes you made before.
If you handle the first credit cards you get after bankruptcy with care, then other credit card issuers will likely view you as more reliable and approve you for further credit. Healthy credit card strategies include keeping your credit utilization rate low and paying off your credit card balances in full every month if you are able. Paying the balances in full will allow you to avoid interest charges and have available credit as high as your credit line.
Raising your credit scores and building credit after a considerable upheaval like bankruptcy can take some time and patience. Credit scores are notorious for not changing overnight. You might need to wait for some time to pass before you see the effects of your hard work.