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How to Rebuild Credit After Bankruptcy Rebuilding credit after bankruptcy as an entrepreneur can be challenging — but it is not impossible if you know how.

By Baruch Mann (Silvermann)

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Opinions expressed by Entrepreneur contributors are their own.

Bankruptcy can provide financial relief, but the downside is that it can negatively impact credit. While bankruptcy will remain on a credit report for as long as 10 years, the impact will lessen with time. Whether you filed Chapter 7 (which means you have the ability to pay back your debts) or Chapter 13 (you're required to pay your creditors all of your disposable income), it is possible to start rebuilding credit with some simple measures.

Rebuilding credit after bankruptcy as an entrepreneur can be challenging, but it's not impossible. The first step is understanding that rebuilding credit 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 won't be repaying covered debts in full as per the original credit agreement. This means that when filing for bankruptcy, it 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 to obtain credit or loans in the future. An entrepreneur 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 bankruptcy type, lenders will see it on a credit report within the public records section, and it is likely to be a decision-making factor. After completing the legal process, it will show the bankruptcy and included debts that have been discharged.

However, it's important to note that filing for bankruptcy can also provide a fresh start for an entrepreneur, allowing them to discharge debt and start anew.

When applying for credit, lenders may not approve certain types of credit — and even if approved, an individual may find that they're 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 an entrepreneur to get a credit card after filing for bankruptcy. Many lenders view individuals who have filed for bankruptcy as a higher 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 that is specifically designed to help rebuild credit. An ideal card option is a secured credit card — approval is possible even with a fresh bankruptcy. Secured cards typically have a credit limit equal to the amount of security deposit that is provided.

However, some unsecured card issuers won't pull a credit score or may extend a line of credit even if there are blemishes on someone's credit history. Just be aware that these types of cards typically have extremely high rates and an abundance of fees. A secured card is likely the better option with lower costs.

The best ways to build credit after bankruptcy

As soon as a bankruptcy has been finalized, the individual can start working on building credit. Some of the best ways include the following:

Maintain payments on non-bankruptcy accounts

After filing, determine if any accounts have not been closed. While bankruptcy cancels most debt, there may be some remaining. Paying down these balances can lower the debt-to-income ratio — making timely payments remains crucial. Consistent payments will also help with staying on top of bills.

Keep credit balances as low as possible

Credit balances not only impact the credit utilization ratio but depending on how the need to file for bankruptcy was developed, people should look to avoid falling into the same habits. Reduce credit card usage and pay down balances — it will benefit your financial health.

Build emergency savings

Save some money each payday to build emergency savings. This will provide a fund for unexpected expenses, which will help to avoid incurring future debt that could impede rebuilding credit.

Get a secured card

As we touched on above, a secured credit card could help with rebuilding credit. While a security deposit is necessary, each time that a repayment is made on the card's account, it will be reported to the credit bureaus. This will demonstrate responsible credit behavior.

Some secured card issuers allow cardholders to move on to an unsecured card after making consistent and on-time payments. This is a great benefit as there will be no need to apply for a new card as credit starts to improve.

Consider credit builder loans

A credit builder loan could be another way to help build credit. An individual will need to have a certain amount of money held in a secured 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 borrowing against savings.

As with a traditional loan, the payment activity for a credit builder loan will be reported to the major credit bureau, which will help to improve credit scores over time.

Related: I Filed for Bankruptcy at Age 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 ratio and low debt-to-income ratio, they should start to see positive changes to 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. While the effects will diminish over time, responsible behavior will lead to improvements. Stay patient.

Related: 6 Steps Resilient Entrepreneurs Take to Rebound 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, an individual will need to wait at least four years after bankruptcy has been discharged. If there are extraneous circumstances, it may be possible after two years.

Baruch Mann (Silvermann)

Entrepreneur, Investor, Analyst

Baruch Silvermann is a financial expert, experienced analyst, and founder of The Smart Investor, which helps consumers make better financial decisions. Silvermann has contributed to and been cited in top financial outlets like Forbes, Business Insider, CNBC Select, CNET, Bankrate and more.

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