Learn how to rebuild credit after Chapter 13 bankruptcy.
By Cara O'Neill, Attorney · University of the Pacific McGeorge School of Law
Filing for Chapter 13 bankruptcy allows debtors to catch up on delinquent accounts—such as their mortgage, car loans, or back taxes—and to keep property they would otherwise lose in foreclosure or repossession. After completing Chapter 13 bankruptcy, debtors emerge with their accounts current and property intact. Despite its benefits, Chapter 13 bankruptcy can harm a filer's credit, but you can take steps to rebuild it.
- Rebuilding Credit and Avoiding Another Chapter 13 Bankruptcy
- Checking for Credit Report Mistakes
- Opening and Maintaining New Accounts
- Changing Spending Habits
Rebuilding Credit and Avoiding Another Chapter 13 Bankruptcy
A Chapter 7 bankruptcy can remain on your credit for up to ten years after the filing date. However, a credit reporting agency will typically remove a Chapter 13 bankruptcy sooner because it involves repaying creditors, usually after seven years.
Because the length of Chapter 13 is three to five years, you can expect a Chapter 13 notation to drop off relatively soon after receiving a "discharge," the order that wipes out balances on qualifying debt in Chapter 13.
These steps can help you get your financial life back on track after bankruptcy.
Checking for Credit Report Mistakes
Errors on your credit report can be harmful when rebuilding credit. You'll want to obtain a copy of your credit report and review it carefully for any mistakes. You can get a free report from each major credit reporting bureau once per year at AnnualCreditReport.com. Ordering one report every four months is usually the right approach. That way, you can check on requested changes without incurring additional costs.
If you do find an error, contact the creditor and the credit reporting agency to make sure the information is corrected or updated. Each reporting company—Equifax, Experian, and Transunion—will allow you to make change requests online.
Opening and Maintaining New Accounts
Many debtors begin receiving offers for new credit cards shortly after receiving a discharge. You'll want to review the terms of these offers carefully, as many will typically contain annual fees or high interest rates. You'll also want to steer away from cards with low limits. Your score is calculated in part on available credit—the more the better. A low limit can actually harm your overall score.
Each lender has procedures and guidelines for reviewing credit applications, so the terms depend on the lender. However, the effect of bankruptcy will continue to diminish over time, allowing you to qualify for better loan terms.
If you can't get an unsecured card, consider obtaining a secured credit card through your bank. Getting a secured credit card generally requires depositing an amount equal to your credit line (it serves as collateral). You'll want to ensure the card issuer will report your monthly payments to the credit reporting agencies. Otherwise, you won't receive a credit-boosting benefit.
After obtaining new credit cards, you should keep your accounts current by making timely payments each month and keeping a balance below 30% of your available limit. Learn about the differences between secured and unsecured debt.
Changing Spending Habits
Many debtors file for bankruptcy because of medical expenses, job loss, or other reasons that are out of their control. However, if you had to file for bankruptcy relief because of excessive spending, consider reviewing your spending habits and changing them accordingly to avoid another bankruptcy. You can start by reviewing some of the many apps available for this purpose. Some banks even have programs that will do so for you.
