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Bankruptcy can provide financial relief, but the downside is that it can negatively impact credit. Although bankruptcy will remain on a credit report for up to 10 years, the impact will lessen over time. If you’ve filed Chapter 7 (meaning you have the ability to pay off your debts) or Chapter 13 (you’re obligated to pay creditors all of your disposable income), you can start rebuilding credit with a few simple steps. .
Rebuilding credit after bankruptcy as an entrepreneur can be challenging, but not impossible. The first step is to understand that credit rebuilding takes time and consistent effort.
How bankruptcy affects credit
Payment history is one of the most important factors when determining credit scores. When someone files for bankruptcy, the individual fails to fully pay the debts covered under the original credit agreement. This means that filing for bankruptcy can have a severe negative impact on someone’s credit score.
A bankruptcy filing will appear on an individual’s credit report for up to 10 years, making it difficult for them to get credit or loans in the future. A business owner may also have difficulty obtaining credit from suppliers or vendors, as they may be hesitant to extend credit to a business that has filed for bankruptcy.
Regardless of the type of bankruptcy, creditors will see it on a credit report in the public records section and is likely to be a factor in their decision making. Once the legal process is completed, it will show the bankruptcy and the included debts that have been paid off.
However, it is important to note that filing for bankruptcy can also provide a new beginning for a business owner, allowing them to pay off debt and start over.
When applying for credit, lenders may not approve certain types of credit – and even if approved, an individual may find that they are offered higher interest rates or other unfavorable terms.
Related: How This Entrepreneur Achieved His Greatest Success After His Worst Failure
Can I get a credit card after bankruptcy?
It can be difficult for a business owner to obtain a credit card after filing for bankruptcy. Many creditors view individuals who have filed for bankruptcy as a greater risk. However, it is possible to get a credit card after bankruptcy, but it may take time and effort.
The best approach is to apply for a card specifically designed to help rebuild credit. An ideal card option is a secured credit card – approval is possible even with a new bankruptcy. Secured cards usually have a credit limit equal to the security deposit amount provided.
However, some unsecured card issuers won’t take a credit score or may extend a line of credit even if there are blemishes on someone’s credit history. Be aware that these types of cards often have extremely high fees and fees galore. A secured card is probably the best option with the lowest costs.
The Best Ways to Build Credit After Bankruptcy
Once the bankruptcy is finalized, the individual can begin working on building credit. Some of the best ways include the following:
Keep payments on non-bankrupt accounts
After archiving, determine if any accounts were terminated. Although bankruptcy cancels most of the debt, there may be some remaining. Paying off these balances can lower your debt-to-income ratio – making payments on time remains crucial. Consistent payments will also help you keep track of bills.
Keep credit balances as low as possible
Credit balances not only affect the rate of credit utilization, but depending on how the need to file for bankruptcy has developed, people should try to avoid falling into the same habits. Reduce credit card usage and pay off balances – it will benefit your financial health.
Create emergency savings
Save some money each payday to build emergency savings. This will provide a fund for unexpected expenses, which will help you avoid incurring future debt that could impede credit rebuilding.
Get a secure card
As we mentioned above, a secured credit card can help with credit rebuilding. Although a security deposit is required, each time a refund is made to the card account it will be reported to the credit bureaus. This will demonstrate responsible credit behavior.
Some secure card issuers allow cardholders to switch to an unsecured card after making consistent and timely payments. This is a huge benefit as there will be no need to apply for a new card as your credit starts to improve.
Consider Credit Builder Loans
A credit building loan can be another way to help build credit. An individual will need to have a certain amount of money kept in an escrow savings account, but the individual can make monthly payments until the loan amount is repaid. Depending on the lender, it is also possible to have a secured loan that allows you to borrow against savings.
As with a traditional loan, payment activity on a credit building loan will be reported to the main credit bureau, which will help your credit score improve over time.
Related: I Filed for Bankruptcy at 21
How long until credit improves?
This will depend on an individual’s specific circumstances, but if someone is making consistent payments and has a low credit utilization rate and low debt-to-income ratio, they should start to see positive changes in their credit score after approximately six months.
However, be prepared to take a long-term approach. Remember that bankruptcy will be on a credit report for seven to 10 years. Although the effects diminish over time, responsible behavior will lead to improvements. Be patient.
Related: 6 Steps Resilient Entrepreneurs Take to Recover from Bankruptcy
Can I get a mortgage after bankruptcy?
There is no need to wait for bankruptcy to disappear from a credit report to apply for a mortgage. However, if applying for a conventional mortgage, the individual will need to wait at least four years after the bankruptcy is cleared. If there are strange circumstances, it may be possible after two years.