Understanding the Ways to Rebuild your Credit Score After Bankruptcy

Before understanding how to fix a credit score after bankruptcy, it is important to know what bankruptcy is. Bankruptcy is a financial condition where you officially declare that you cannot pay your outstanding loans or bills, and request for a legal debt relief. It is a legal process where the court acknowledges that you cannot repay your liabilities and provides a way to settle them. It allows you to clear or restructure your debts.

 

Although it is a necessary step to regain financial stability, the process can significantly impact your credit report. It does not erase your bad credit history—it only provides temporary relief. To regain financial health, you must plan strategically and take steps to rebuild your credit score.

 

Before moving ahead to understand how bankruptcy can affect your credit report, let's understand more about a credit score.

A credit score is a three-digit number that indicates your creditworthiness and how likely you are to repay loans on time. It plays a crucial role in financial decisions, influencing loan approvals, interest rates, and credit limits.

 

There are two main types of credit scores:

Personal Credit Score

This reflects an individual’s credit history and impacts their ability to secure loans, credit cards, or mortgages. In India, credit bureaus like TransUnion CIBIL, Experian, and Equifax generate these scores.

Business Credit Score

This assesses a company’s creditworthiness based on factors like financial statements, payment history, and credit utilisation. Institutions like TransUnion CIBIL and CRIF High Mark provide business credit reports.

Filing for bankruptcy can significantly lower your credit score, sometimes by several points. The exact impact depends on your credit history before filing. If you had a high credit score, you may see a sharper drop compared to someone whose score was already low.

 

Since payment history is a key factor in your credit score, bankruptcy is seen as a major negative event. This can make lenders hesitant to approve new credit applications.

 

Here’s how bankruptcy affects your credit score:

• Score Drop

  A bankruptcy filing can reduce your credit score by 130 to 240 points, depending on where you started. For example, if your score was around 680, you might lose 130–150 points. If it was 780, the drop could be 200–240 points.

• Payment History Impact

  Since payment history makes up 35% of your total credit score, filing for bankruptcy has a severe negative effect.

• Time on Credit Report

  The impact of bankruptcy lasts for years. Chapter 7 and Chapter 13 are the two key types of consumer bankruptcies, and their impacts on your CIBIL score vary. A Chapter 7 bankruptcy remains on your credit report for 10 years, while a Chapter 13 bankruptcy stays for 7 years.

  • Chapter 7 bankruptcy

    Your assets are sold to repay debts. It’s for those who cannot afford a repayment plan.

  • Chapter 13 bankruptcy

    You keep your assets but repay debts through a 3 to 5-year plan. It suits those with a steady income.

• Creditworthiness

  Bankruptcy indicates financial struggles, making lenders view you as a higher-risk borrower.

Bankruptcy stays on your credit report for 7 to 10 years, but its impact reduces over time. While it can drop your credit score significantly, you can start rebuilding your credit right away with the right approach.

 

Here are some key ways for how to rebuild credit after bankruptcy:

• Apply for a Secured Credit Card

A secured credit card is issued against a fixed deposit, with your credit limit set as a percentage of the deposit. Using it responsibly helps improve your credit score.

• Monitor Your Credit Report Regularly

Check your credit report at least once or twice a year to ensure all details are accurate. If you find errors, such as any incorrect debt or any open account that should be closed, bring it to the customer service’s notice immediately. 

• Take a Small, Affordable Loan

After a year or two, consider taking a small loan that you can repay easily

• Keep Existing Credit Cards Active

Don’t close old credit cards just because of past financial difficulties. Keep them active and make timely payments to boost your credit score.

• Make Timely Payments on All Bills

Payment history accounts for 35% of your credit score. Ensure you pay credit card bills, EMIs, and utility bills on time to build a positive repayment history.

• Maintain a Low Credit Utilisation Ratio

Try to use only a small portion of your available credit limit. Keeping credit usage below 30% can help.

• Avoid Credit Repair Services

Some companies promise to improve your credit score quickly, but these services are often expensive and unreliable. Instead, focus on responsible financial habits to rebuild your credit naturally.

• Apply for a Loan with a Co-signer

Having a co-signer with a strong credit score can increase your chances of approval and help you secure better loan terms. However, your co-signer will be responsible for the debt if you miss payments, so you must only take this step if you’re confident about repayment.

Rebuilding credit after bankruptcy takes time and discipline. Your score may drop below 500, but with responsible financial habits, you could reach 650+ in about 2 years and 750+ within 3-4 years.

 

Recovering from bankruptcy is challenging, but not impossible. By taking the right steps, you can gradually rebuild your credit. With consistent effort, you can regain financial stability and improve your credit score over time. Remember, bankruptcy does not mean the end of the world. You can still rebuild your credit score in several ways.