Credit after bankruptcy | Consumer Debt Group


Effects of Bankruptcy on Credit

One of the questions that bankruptcy lawyers and credit counselors are frequently asked is whether a person considering bankruptcy will be able to acquire new credit after filing for bankruptcy. Specifically, the debtors want to know if they can keep a card after filing for bankruptcy by not including that credit card in the bankruptcy petition or they wonder if they will ever be able to get a new card after bankruptcy. Additionally people wonder if they will ever be able to purchase a home and how badly will their credit record be ruined after a bankruptcy filing. Each of these questions is answered below.

Will You Be Able To Keep A Credit Card? Obtaining New Credit After Filing for Bankruptcy Buying a Home after Bankruptcy

Will You Be Able To Keep A Credit Card?
Some credit card companies will allow the credit card holder to keep their credit card for use after bankruptcy while an equal number will not. The important thing to note is that when you file a bankruptcy petition you are legally obligated to list all assets and liabilities and you sign the bankruptcy petition's supporting schedules under penalty of perjury. In short, you should list all credit cards with outstanding balances or you run the risk of being charged with bankruptcy fraud which is a federal crime.

If you have a credit card that has a zero balance you need not give the credit card company notice of your bankruptcy. Chances are, you will be able to retain this card; however, the credit card company can find out about your bankruptcy, especially if they inquire into your credit for the purpose of making you an unsolicited credit offer, and they may cancel the card as a precaution. Alternatively, some credit card companies allow credit card holders to keep their credit card notwithstanding a bankruptcy as long as the cardholder agrees to "reaffirm" the balance on the card. They will probably require that you enter into a new agreement, signed after the bankruptcy filing.
back to the top

New Credit after Filing for Bankruptcy
I often joke that the easiest way to obtain credit is to file for bankruptcy. You would be amazed at how all the auto dealers in your neighborhood will offer you a car loan to help you reestablish your credit. The hard cold fact is that lenders will lend money to people who have recently filed for bankruptcy. It will cost you more because your interest rate will undoubtedly be higher and the lender will want to keep a "short leash" by giving you a lower credit limit but you will be able to get credit. One of the easiest and fastest ways to get credit is to get a secured credit card (a credit card that is secured by the amount of funds that you place in a savings account) as you present less of a risk. This is an excellent way to reestablish credit.

Buying a Home after Bankruptcy
Ask a loan broker if he can get you a home loan after you have filed for bankruptcy and chances are he will ask "have you made timely payments on your obligations for two years after filing for bankruptcy?" Normally you will qualify for a loan between 18 to 24 months after a bankruptcy discharge. Generally, after filing Chapter 13 you will be able to obtain a loan within one year and if you filed a Chapter 7 you will be able to qualify for a loan within one year if you can show: The bankruptcy was caused by extenuating circumstances beyond your control; Since the bankruptcy was filed you have shown an ability to manage your financial affairs; and Your current situation is such that the events leading to the bankruptcy are not likely to recur.

As a practical matter, almost anyone can obtain financing to purchase a home within two years after they file a bankruptcy petition. Many home loans are dependent on FHA or VA loan guarantees. The FHA will still insure mortgages to individuals who have filed a Chapter 7 liquidation bankruptcy two years after the discharge as long as the borrower has re-established good credit and has demonstrated the ability to manage their financial. In short, if you pay your bills on time for two years after a Chapter 7 and (acquiring new credit and paying it on time helps) the FHA will probably insure you. If you filed a Chapter 13 and have completed one year of plan payments in a timely manner and get court approval of the transaction, the FHA will also probably insure you.

The VA has similar regulations. In fact, the VA will disregard a bankruptcy that was discharged more than 2 years ago. If the discharge was more than one year ago but less than two years, the VA will still guarantee the loan if you have obtained new credit since the bankruptcy and have satisfactorily made timely payments and the bankruptcy was caused by circumstances beyond your control like unemployment, prolonged strikes, or medical bills that were not covered by insurance.

Other effects of bankruptcy on credit must be assessed on a case-by-case basis. Most lenders do not make their lending criteria public; however, it is clear that payment ability and credit history are the two main factors. Lenders will generally determine if you have the ability to pay a loan before they give you credit. Bankruptcy discharges normally improve one's ability to make loan payments because, presumably, you will no longer be the subject of collection activities like garnishments and judgments and some of your debt was probably wiped away. Credit history is important because normally the way that you paid your bills in the past is an indication of how you will pay in the future. Creditors will determine how your credit was before the circumstances, which caused the bankruptcy and your credit since the bankruptcy. If you paid your bills on time before you will probably find it easier to re-establish credit.
back to the top