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Recover from a Bankruptcy by Repairing Your Credit

Every year, hundreds of thousands of individual debtors who are unable to repay their creditors file for bankruptcy protection in the United States. The process provides an opportunity to survive trying financial times, but it also carries with it long-term impacts that can affect a person’s ability to financially grow and thrive, even once they’re back on their feet.

A person holding their head looking at their computer distressed.

Because of the perceived credit risk, financial institutions may not consider loan applications of someone who has filed for bankruptcy. In fact, bankruptcy information – including the date of the filing and later date of discharge – could remain on a credit report for up to 10 years. A shaky credit history not only can limit the ability to receive future credit, but also harm job prospects, make insurance companies hesitant to offer adequate coverage, and even affect whether someone can get an apartment lease.

With so many ripple effects resulting from a bankruptcy, the recovery process becomes incredibly important to a debtor’s future prospects.

Before bankruptcy

Frequently, the best way to contend with a bankruptcy is to never declare it at all. Even when things appear hopeless, there may be options and strategies to help someone in dire straits escape a credit disaster.

  • Talk with creditors: Being open and honest with a creditor can open opportunities for assistance, especially if it is a company or organization that is experienced in offering financing. They may have modified payment plans or programs that provide relief in certain circumstances.

  • Contact credit counseling services: These organizations will work with a debtor and their creditors to develop debt repayment plans. Such plans require a monthly deposit to the counseling service, which then pays the creditors. Some nonprofit organizations will charge little to nothing for their services.

  • Consider alternatives: It may not be an ideal solution, but a second mortgage or home equity line of credit may offer the key to escaping debt by consolidating it. However, the drawback is they require the debtor’s home as collateral. There likely will not be a way out of a debt crisis without some type of repercussions, but certain alternatives to bankruptcy may better preserve a financial reputation.

After bankruptcy

A person can recover from a bankruptcy filing, but it will take time and some prudent financial behaviors.

  • Be conservative with credit cards: Post-bankruptcy, creditors will want to see that the filer is learning to responsibly handle debt. The simplest way to do that is be conservative with credit accounts, particularly credit cards, by avoiding spending too close to a card’s limit and paying off the balance on time each month.

  • Pay bills on time: Being timely isn’t only important for credit cards. Payment history, be it for a loan, lease or an electric bill, is an important consideration for future credit applications. Even a relatively small number of late payments can damage a credit rating, especially when it belongs to someone who in recent years declared bankruptcy.

  • Keep debt low: Overall, the less outstanding credit you have, the better your credit standing. This is a good lesson for most consumers, but especially for someone who has previously filed for bankruptcy protection. Low credit usage is a factor in calculating a credit score.

Credit is a benefit and a risk, a tool with the power to build wealth and one a debtor must respect. Bankruptcy, too, has positive attributes while carrying a risk for negative impacts.

Considering the tenuous situation it can create, declaring bankruptcy is a decision that someone must be clear-eyed about making — both in terms of the ramifications from undergoing the process and the work it will take to repair credit to a healthy status. With the right approach, however, a bankruptcy is a fresh start at developing a healthy relationship with credit1.

For more on managing credit, including responsible credit card use and credit report basics, check out FNB’s free financial education resources. Online and Mobile Banking customers also have access to FNB’s Credit Center, where they can see their updated credit score, the factors impacting it, set goals and receive recommendations for improving their score.

Notices & Disclosures
1 - Seeking the advice of a qualified attorney is strongly recommended because bankruptcy has long-term financial and legal outcomes. Misunderstandings of the law or making mistakes in the process can affect your rights. Court employees and bankruptcy judges are prohibited by law from offering legal advice.

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