Many debtors worry that filing bankruptcy will affect their credit. It might, but the impact might not be as drastic as you think.
Your Credit Score
If you have a good credit score, filing bankruptcy will probably cause it to fall significantly. If you don’t really need a bankruptcy — if a few months of belt-tightening will solve your debt problems, or if you can negotiate more favorable repayment terms for problem debts — then avoiding bankruptcy might be the best way for you to salvage your credit score.
The sad truth is that if you are in a position to file bankruptcy, you probably have a poor credit rating already. If you’ve missed payments, if you are making only the minimum monthly payments on your credit cards, if you have reached the maximum limit on your credit cards or home equity line of credit, if you have been turned down for loans or credit cards, or if your debt is high compared to the value of the assets you own, your credit score has already been damaged.
In the short term, filing bankruptcy might make a poor credit score slightly worse, but in the long term, your improved ability to pay debts as they arise will be reflected in an improving credit score. If you continue to struggle with debt, your credit score will never improve. The fresh start that a bankruptcy offers will eventually help you rehabilitate your credit score, assuming that you use credit wisely and responsibly after you receive your bankruptcy discharge.
Your Credit Report
Your bankruptcy filing can appear on your credit report for ten years. In some circumstances a bankruptcy can be reported even after ten years have lapsed, but most reporting agencies will delete the bankruptcy from their records after ten years have passed.
Obtaining Credit After a Bankruptcy
Whether you can obtain credit after receiving a bankruptcy discharge depends upon the creditor. Many debtors receive multiple offers for credit cards after receiving a discharge because credit card companies know they are protected from another bankruptcy filing for several years.
You need to be wary of those offers because the credit card companies often charge very high interest rates to people who have been through a bankruptcy. You might also be able to get an easy car loan from a subprime lender, but once again, the interest rates you will be charge are likely to be extremely high.
Other creditors, like your local bank, might be willing to extend credit to you on their usual terms, particularly if the loan is secured by a mortgage or a lien on property that you are using the loan to purchase. Some creditors are particularly impressed if you completed a chapter 13 plan because you made an effort to repay your creditors rather than discharging all of your debt.
There are minimum waiting periods for certain kinds of loans. You cannot receive an FHA-insured mortgage loan until one year after a chapter 13 discharge or two years after a chapter 7 discharge. Those waiting periods double if your lender sells its mortgage loans to Fannie Mae. Even after those waiting periods pass, your lender will need to decide whether you are creditworthy.
You may have to prove your ability to stay out of debt, to earn a steady income, and to save some money before conventional lenders are willing to extend credit to you.
Bankruptcy is complex and many answers depend upon your specific situation. If you still have questions you can schedule a free consultation with a bankruptcy attorney.