How Does Bankruptcy Affect Your Credit?

Key takeaways

• Bankruptcy stays on your credit report for up to 7 years if you file Chapter 13, or 10 years if you file Chapter 7. Its impact may weaken over time.
• You may be able to rebuild your credit score by making on-time payments and not using too much of your available credit.
• But even if you improve your credit score, some lenders will deny you or offer you high rates until the bankruptcy is removed from your credit report.

Filing for bankruptcy has a heavy impact on your credit. Depending on how high your credit score is to start, you could lose hundreds of points, and it’s a negative mark that can stay on your report for up to 10 years.

Sometimes, though, bankruptcy is the best option, and there are ways to rebuild your credit after the initial fall.

How bankruptcy affects your credit report

A bankruptcy will show up on your credit report, and it leaves a deep scar — especially at the outset.

A Chapter 7 bankruptcy will stay on your credit report for 10 years, and a Chapter 13 bankruptcy will sit on your report for 7 years. The clock starts ticking when you file for bankruptcy, rather than when the court discharges your case.

A big misconception is that bankruptcy somehow wipes out your entire credit history, giving you a clean slate.

“That’s not true,” says Markia Brown, AFC, a financial counselor in Los Angeles. “You still have to rebuild your credit through the establishment of good money habits.”

So if you have late payments from an account included in your bankruptcy filing, they won’t drop off your credit report, even though the balance on the account may go to zero.

How bankruptcy affects your credit score

Immediately after you file for bankruptcy, you can expect to see a serious drop in your credit score. How far you fall depends on different factors, including your pre-bankruptcy score — the higher your credit score, the further there is to fall.

There is good news, though. While a bankruptcy will stay on your credit report for seven to 10 years, the effect on your credit score will ease over time, because the scoring models focus on your most recent credit behavior.

On the other hand, just because your credit score improves, the bankruptcy will still affect your credit so long as it stays on your report. Some lenders will still not let you borrow if there’s a bankruptcy on your credit report, no matter how much you’ve improved your score since then.

Personal loans, auto loans, and credit cards after bankruptcy

Just because some lenders won’t work with you, that doesn’t mean it’s impossible to get a loan, line of credit or even a mortgage after filing for bankruptcy. Just be prepared to get offers that might be less than ideal.

Because you have a bankruptcy on your credit report, you’re more likely to run into high interest rates, lower lending amounts and more punitive fees.

Whether you should borrow money anyway will depend on your own situation.

“Some people are willing to pay the higher interest because they need the positive history they would build by paying on time,” says Brown. “Others would rather wait until the offers from lenders improve.”

Personal loans after bankruptcy

It’s always wise to be careful when applying for a personal loan, but it’s especially true when you’re applying for a personal loan after bankruptcy. Even if you’re willing to pay higher rates, keep an eye out for predatory practices, like balloon payments or lenders that charge upfront fees.

Auto loans after bankruptcy

You can get a car loan after bankruptcy, though you’ll probably face higher rates, less favorable terms and a higher down payment. Like personal loans, it’s a good idea to avoid any balloon payments on auto loans, whether you have a bankruptcy or not.

Credit cards after bankruptcy

If you’re applying for a credit card after bankruptcy, consider getting a secured card, where you make a deposit up front and then draw money against it. Secured cards can help you get your foot in the door if you’re denied for traditional, unsecured credit cards. But as always, be sure to make your payments on time, and don’t use all your available credit so that your credit utilization ratio stays low.

How to rebuild credit after bankruptcy

Rebuilding your credit after bankruptcy comes down to understanding which factors help your credit report and credit score the most.

FICO scoring models are the most commonly used by lenders. Here’s how FICO weights the different factors:

• Payment history (35%): The most important factor is whether you’re making payments on time.
• Amounts owed (30%): If you have a ton of credit but all of your accounts are maxed out, this isn’t good for your credit score. Try to keep your total debt low and credit utilization low.
• Length of credit history (15%): Depending on how you file for bankruptcy, you may be able to exclude some accounts from your filings or keep them under a new payment plan. The longer an active account has been open, the bigger its positive impact.
• Credit mix and new credit (10% each): Ideally, a strong credit report has a mix of different lending products, like installment loans (such as a car loan) and revolving credit accounts (like a credit card). It can also help your score a little if you avoid opening up too many new credit accounts at once.

If you want some help tracking all of this, you can use the free LendingTree Spring tool, which can guide you as you work your way from bankruptcy to a positive credit history.