How to Repair Credit After Bankruptcy

Reader Question: My husband and I had to file bankruptcy last year. We know it will hurt our credit but we're hoping we can buy a home again in the near future. What are the steps to repair credit after a bankruptcy filing? Where should we start?

I'm sorry to hear about the bankruptcy situation. At the same time, I'm happy to tell you it's not the end of the world, financially speaking. Yes, it is certainly possible to repair your credit after such an event. It just takes time. In fact, whenever I answer this kind of question, I like to use the phrase "time and good behavior" to describe the way forward.

Let's talk about the first part of my little mantra -- the time factor. The Fair Credit Reporting Act establishes certain guidelines that the three credit-reporting companies (Equifax, Experian and TransUnion) must follow. One of these guidelines has to do with bankruptcies. By law, a bankruptcy cannot stay on your credit report more than ten years.

Of course, this is both good and bad depending on how you look at it. The downside is that a bankruptcy could stay on your record for up to a decade, so it will be noticeable to any lender who reviews your credit history. The upside is that it can't follow you for ever.

This is where the "time and good behavior" mantra comes back into the picture. The effects of a bankruptcy will fade with time. And even while it does follow you, you can still work to repair your credit after a bankruptcy filing. You can do this by being financially responsible -- by paying all of your bills on time, by reducing your debt, by closing old accounts. Over time, this shows a potential lender that your past financial misfortune was an isolated event, and that you've demonstrated your financial responsibility since that time. On the other hand, if the filing was just one of a long series of financial misfortunes and irresponsible actions, then it suggests a dangerous pattern to lenders.

So to sum up...

Yes, you can repair your credit rating after a bankruptcy event. Experian, TransUnion and Equifax can report bankruptcies for up to ten years, but no longer. In the meantime, you can "lessen the blow" by establishing a pattern of financial responsibility and diligence.

Related information:
Buying a Home After Bankruptcy

I hope this answers your question, and I wish you luck in your future home-buying process. I hope it all works out for you.