If you’re considering filing for bankruptcy, you may be wondering, “How will bankruptcy affect my credit?” By law, a bankruptcy can remain on your credit report for up to ten years. This means that you will have a much harder time getting credit. You’ll likely have an extremely difficult time getting a home loan, and you will no longer have the benefit of using credit cards. However, you can recover from this.
During the 10-year period while the bankruptcy is on your credit report, you may receive credit card offers with very high interest rates (sub prime rates). This is because lenders view you as a “high risk borrower” due to your past bankruptcy. You will need to work diligently to improve your credit score, and re-establish trust with creditors by paying your bills on time.
Typically, it is easier to re-establish credit with a Chapter 13 bankruptcy, than with a Chapter 7 bankruptcy. Chapter 7 bankruptcy is the blackest mark you can have on your credit. In Chapter 7, most of your debts are discharged (with the exception of child support, alimony, etc.). This makes qualifying for a new loan or a new credit card very unlikely for at least two years, possibly longer. However, you may be able to qualify for a federal student loan, since federal law prohibits discrimination against students based on credit factors.
Chapter 13 bankruptcy is also referred to as “reorganization” and it does not discharge all of your debts. Instead, it provides you with a repayment plan to pay off your debts in manageable amounts and timeframes. A Chapter 13 bankruptcy will have a negative effect on your credit report, but it does show your willingness to pay your debts rather than to completely discharge them. This should help you obtain new credit within a year or so.
Many people believe that bankruptcy means you can’t buy a home for at least 10 years. However, this is not true. You may be able to get a home loan beginning two years after a Chapter 7 bankruptcy has been discharged, and one year after filing a Chapter 13 bankruptcy. FHA and VA mortgage loans can be obtained as soon as one year after filing for either Chapter 7 or Chapter 13 bankruptcy.