You might be hesitant to file for bankruptcy because you have heard that it will hurt your credit score. Find out how filing for bankruptcy can improve your credit in the long run, and what you can do to build your credit score back up after your debt has been discharged.

What Does Your Credit Score Mean?

Every adult in the U.S. has a credit score. Creditors use that score to decide whether to loan you money, and how much interest to charge you. Your FICO credit score will range from 300 to 850 based on a number of factors in your credit history, such as:

• How much debt you currently have
• How high the balances are on credit accounts
• Your debt-to-credit ratio
• What types of credit you have
• How long you have had credit accounts open
• Whether you have opened new accounts recently
• Your past debt payment history

However, there are several financial problems that can leave a black mark against credit ratings:

• Missed payments
• Late payments
• High unpaid balances
• Debt restructuring
• Frequent credit inquiries
• Foreclosure
• Bankruptcy

How Does Bankruptcy Affect Your Credit?

It is true that bankruptcy will lower your credit score by 160 to 200 points. The better your credit score was at the time you filed, the more significant the effect on your credit will be. However, that one number isn’t the whole story.

Remember that few taxpayers file bankruptcy petitions without first struggling through a period of financial hardship, juggling debts, making minimum payments, and letting balances add up. These missed payments and increased revolving debt can have a significant impact on your credit score, even before you file your petition. When a bankruptcy is discharged, many of those unpaid debts go away, and the effect they have on your credit score will soon follow. As a result, many petitioners’ credit scores went up after filing chapter 7 bankruptcy.

How Long Does Bankruptcy Affect Your Credit?

If you have filed for a Chapter 7 bankruptcy, your eligible debt will be discharged within a few months of filing the petition. The effects of those bad debts will begin to drop off your credit score after about 7 years. We have seen The Chapter 7 bankruptcy itself will remain visible for 10 years. At John A. Steinberger & Associates, P.C., we have clients whose scores improve to 700 within one year of filing.

A Chapter 13 bankruptcy payment plan takes 3 to 5 years to complete. After that period, any remaining eligible debt is discharged. The Chapter 13 bankruptcy itself will remain on your credit history for 7 years after the petition is filed. However, the debts themselves may show up a few years longer based on how long it took them to be paid off or discharged.

When Can you Get a Loan After Bankruptcy?

Just because your bankruptcy will still show up on your credit report for 7-10 years doesn’t mean you need to wait that long to start rebuilding your credit. How long that will take before you are approved depends on the type of bankruptcy you filed and the type of loan you are looking for.

How Long After Bankruptcy Can You Buy a Car?

Legally, there is nothing stopping you from buying a car immediately after your bankruptcy is discharged. However, until you have rebuilt your credit, it may be hard to find a lender who is willing to give you the money you need to make a vehicle purchase. The good news is the effect of a bankruptcy on your credit score reduces over time. The longer you can wait, the less impact your bankruptcy will have, and the more likely your bank or auto lender will approve your loan on more favorable terms.

Under a Chapter 13 bankruptcy, you may qualify for a new loan within one year of your bankruptcy petition, even while you are still completing your payment plan. Generally speaking, you will not be allowed to take on new debt while your Chapter 13 bankruptcy is pending. However, your bankruptcy attorney may be able to petition the court to allow you to take on new debt through lenders that work with Chapter 13 cases.

How Long After Bankruptcy Can You Buy a House?

Most mortgage lenders -- including those backed by the federal government -- have official waiting periods after your bankruptcy is discharged before you can be considered for a home loan. For Chapter 7 bankruptcies, you should plan to wait:

• Conventional loans by banks and mortgage companies: 4 years
• USDA loans for rural property: 3 years
• VA loans through the Department of Veterans Affairs: 2 years
• Federal Housing Administration (FHA) loans: 2 years

The waiting periods after a successfully completed Chapter 13 bankruptcy are often shorter: often just 1 to 2 years after the discharge. However, if you are unable to complete your payment plan and your case is dismissed or converted to a Chapter 7 bankruptcy, you must wait at least 4 years before you apply for a mortgage loan.

How to Build Credit After Bankruptcy

What you do after your discharge will affect your ability to qualify for a mortgage after bankruptcy, and the terms you will qualify for on a loan after bankruptcy. To rebuild your credit after a Chapter 7 bankruptcy discharge completing or a Chapter 13 payment plan, try to:

• Monitor your credit score closely
• Pay all continuing debts on time (such as mortgage payments or student loans)
• Pay bills before their due date (including utility bills and medical expenses)
• Open a secured credit card account (putting up your own money as a bond to protect creditors if you fail to pay)
• Open a single unsecured credit card when you qualify, and pay it off every month if possible
• Take out a credit-builder loan through your bank or credit union and pay it off on schedule
• Find a co-signer (like a parent) to help secure larger purchases

It may seem strange to take out new debt after discharging what you owed before. But remember, your credit history depends on you having credit and managing it well. Your goal should be to establish a positive credit history since your bankruptcy. That means staying up to date with any secured or ongoing debt payments and making strategic choices about adding new credit accounts into the mix.

At John A. Steinberger & Associates, P.C., we don’t treat bankruptcy as the end of your story. We are a full-service bankruptcy law firm in Southeast MI, serving debtors and families in Southfield, throughout Metro Detroit, and in the surrounding communities. We will guide you through your bankruptcy and give you the tools you need to create a plan and rebuild your credit after your debt has been discharged. Call us toll-free at (866) 690-2140 or contact us online to schedule a free initial consultation.