As difficult as going through a personal bankruptcy may be, it also has its benefits. With a Chapter 7 bankruptcy you can stop paying most unsecured debts and they'll be wiped out in court once the bankruptcy has been approved. A Chapter 13 bankruptcy allows you to enter an affordable payment schedule for some accounts and liquidate other debts. In either case, the relief is often enormous. You'll be able to resume normal life without the stress of having to make payments and deal with demanding creditors. You may want to use credit cards again, too.
But can you get a credit card after filing for bankruptcy, or even during? Here's what you need to know. When to apply for a credit card after bankruptcy is almost as important as the type of card you pursue.
What credit card issuers think about bankruptcy
Credit card issuers depend on both credit reports and credit scores to determine qualification. Whichever type of bankruptcy protection you used, the notation will have started to appear in the public record section of your consumer credit reports from the date of filing. A Chapter 7 bankruptcy will stay for ten years and a Chapter 13 stays for seven years.
Once the issuer sees evidence of the bankruptcy, they can make a judgment about you as a potential borrower. The assessment may be negative, since it's a clear indication that you did not handle your financial obligations according to the terms of the contract. However, a case can be made for you being a more attractive credit customer because you no longer have to make the payments. In effect, you have more available income to support the payments associated with a new credit card.
As long as the bankruptcy notation is listed on your credit reports, it will be factored into your credit scores. Most people find their scores dramatically lower after the bankruptcy is listed, but the most severe damage occurs in the first couple of years.
Be aware that the credit damage most likely did not start when you filed for bankruptcy, but when you began to go delinquent on the accounts that you included. Those late payments will continue to show up in the trade lines section of your credit report for a total of seven years. Therefore your credit scores may have already taken a serious hit by the time you used the bankruptcy protection.
Can you get a credit card before discharge?
With a Chapter 7 bankruptcy you aren't allowed to apply for any new lines of credit while the bankruptcy proceedings are still in progress. If you used a Chapter 13 bankruptcy, you will need to obtain court authorization to get a new credit product while the payment plan is in process, which typically lasts three to five years. To find out if you are allowed to open a new credit card during this time, check with the court or the Chapter 13 bankruptcy trustee. The reason you may be prevented is because the payments for the new account can impact your ability to pay the accounts on the payment plan.
The circumstances where the court may approve an application for a credit card would be a case of genuine emergency, special circumstances such as to cover necessary home repairs, and sometimes when needing a business card for your company.
Most likely, your best bet for speedy credit card acceptance is to apply for a secured credit card. Qualification for these cards can be relatively easy because the credit issuer assumes virtually no risk. The cash held in reserve guarantees the credit line. If you run up a debt and don't make your payments, the issuer can simply take the money held in deposit. The security deposit can be as low as $200, though in some cases the credit line will exceed that deposit. Some secured credit cards will automatically convert to an unsecured credit card after you've managed it responsibly for a period of time. At that stage you'll get your deposit back.
For you as a cardholder, secured cards act the same way as traditional, unsecured credit cards. You can use one anywhere credit cards are accepted. Almost all secured credit card issuers report your activity to the three major credit reporting agencies but when reviewing the different cards on the market, make sure that the one you are interested in does. You will want it to work in your favor. Every month you make a charge and then pay the bill in full and on time, you are working towards rebuilding your credit.
Important to note is that secured credit cards for bankruptcy tend to have higher fees and APRs than many other accounts. Some do have rewards programs but they aren't as robust as unsecured credit cards developed for people with good credit.
When can you get an unsecured credit card after bankruptcy?
It can take longer to be accepted for an unsecured credit card after a bankruptcy than a secured card, because the issuer may still consider you to be a risk. Waiting a few months at least, or until you have supplied your credit report with plenty of positive activity with your secured credit card is recommended.
That doesn't mean some credit card issuers won't be wooing you for business as soon as your bankruptcy is complete. Lenders have the right to check credit reports to find potential customers who fit certain criteria. They may identify you as a person who can afford a credit line because you're not carrying any more unsecured debts. More, according to the law, you can't file for Chapter 7 bankruptcy again until eight years have passed.
Just be careful to choose the best unsecured credit card for you, since some come with expensive fees and high interest rates. Read over the terms very carefully and compare them to a variety of different accounts that are designed for people who need to reestablish their credit. You may find credit unions and community banks to be particularly attractive because they can be more forgiving to people with credit challenges.
Ways to build credit after a bankruptcy discharge
Applying for and responsibly using a secured credit card is great way to start rebuilding credit once a bankruptcy is discharged. Over time, if you use your card responsibly and make your payments on time, lenders will see that you’re a trustworthy borrower and you may eventually be able to upgrade to a non-secured card which will likely come with a higher credit limit and possibly more credit card perks. See our best credit cards for after bankruptcy for our top credit card picks and for more tips on how to build credit following a bankruptcy.