Home> Credit Library

Your Credit and Bankruptcy

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005: The changes are now law so read these important revisions to the Act. Come October 2005 the changes are complete and will affect many considering bankruptcy.

Each year more than 800,000 Americans file for protection under the federal bankruptcy laws, according to the American Bankruptcy Institute. Some are credit abusers or are financially irresponsible. But average working families who try to pay all of their bills can find themselves in financial trouble, too. The sudden loss of a job, medical bills, a divorce or even a natural disaster can quickly wipe out a life's savings. For many, bankruptcy provides a second financial chance.

A bankruptcy filing stays on your credit record for up to 10 years, but it need not be a permanent problem. In fact, there are laws that forbid discrimination against you if you have filed bankruptcy. If you show consistent employment history and financial responsibility, you can rebuild your credit. Bankruptcy can relieve the honest but unfortunate debtor from the pressures of excessive debt by providing a fresh start.

It allows you to discharge much of your debt or allows you time to get back on your feet without harassment by creditors. Filing for bankruptcy is tough enough but what about after? How do you begin to rebuild your credit so that you can move forward? You need credit to get credit but who will give you credit and trust you.  Well, it is not as difficult as you may think. While filing bankruptcy is devastating to your credit rating there are options to make sure you have made the best of your credit situation and most importantly made the history accurate.

Accuracy in a bankruptcy
So, you've filed bankruptcy and maybe a few months or even years has passed. You have not even begun to rebuild because you have no clue where to start. The few loans you did try to get were quickly shot down. The biggest problem may not be your bankruptcy itself but the data still in your credit reports months or years later.  You see, when a person files for bankruptcy, all debts that were included must be listed accurately as "Included in BK" If they are not, they still appear to be in collections! The potential lender you just applied with sees a bankruptcy and collection accounts and you appear to have filed and still running up unpaid debt.  You may not think this is important but it is very important. Part of the rebuilding process is to get your credit absolutely free of errors and then begin to rebuild.

All three credit reports will contain all the adverse information from before you filed. This information will be charge offs, judgments, collection accounts and the like. Once your bankruptcy has been successfully discharged, those debts are no longer collectable. Believe it or not, creditors will rarely update your credit reports to reflect "Included in BK." They will leave the debts as they last were, because your the last person they are going to do any favors for. Whether it is intentional or not, It's wrong!  According to the FCRA (Fair Credit Reporting Act), only accurate debts can be listed.

Your credit reports should only show the actual bankruptcy and then the debts as "included in BK." What this does is take a sloppy unreadable report to a concise report. This matters because creditors will see the date of the bankruptcy and determine that all debts were included and you currently have NO collection accounts or charge offs. Remember, we are talking about Your Credit and a Bankruptcy, not perfect credit. Don't be unrealistic and expect perfect credit overnight. 

Below are some helpful pointer so you can achieve the best possible credit reports and tips for rebuilding.

• Check your reports for errors
• Correct the errors
• Apply for a few secured credit cards
• Open a bank account and secure credit with a savings book
• Keep employment stable
• Pay utilities on time (they report when delinquent)

How long may bankruptcy information be included in my credit report?
Both the Bankruptcy Code and the Fair Credit Reporting Act (which regulates what a consumer reporting agency may include in your credit report) are federal law, so the same rules apply to all states. A consumer credit report may include information on a Chapter 7 and Chapter 13 bankruptcy for 10 years from the commencement of the case. We have been advised that at least one major consumer credit reporting agency removes information about Chapter 13 after only 7 years although it is not legally required to do so. Most other credit information may be reported for 7 years, except for civil suits, civil judgments, and arrest records can be reported for at least seven years, but may be reported longer if the governing statute of limitations is longer. For example, in Arizona, a court judgment is effective for 5 years however it may be renewed at the end of that time for another 5 year period and again after that period. As a result, a renewed civil judgment could be reported for as long as it is effective.

The restriction on reporting any credit information do not apply to reports for:

• credit transaction involving, or which may reasonably be expected to involve, a principal amount of $150,000 or more;

• the underwriting of life insurance involving, or which may reasonably be expected to involve, a face amount of $150,000 or more; or

• the employment of any individual at an annual salary which equals, or which may reasonably be expected to equal $75,000, or more.

The governing law, 15 U.S.C. § 1681c (renumbered as § 605) can be viewed at the Federal Trade Commission's site, Fair Credit Reporting Act.

Can you still get a Federal guaranteed student educational loan after you have filed bankruptcy?
Unlike most credit, the granting of government guaranteed educational loans is not based upon credit history or income.  They are instead extended if you meet the statutory and administrative criteria.  Although default on an existing educational loan may effect your ability to get a subsequent loan, the filing of a bankruptcy in itself should not. As a matter of fact, under § 525 of the Bankruptcy code the government is restricted from discriminating against those who have filed bankruptcy. For more information on educational loans, you can check with The Financial Aid Information Page , or the financial aid office at your local college. You may also view our extensive section dedicated to student loan default.

How long after filing bankruptcy will I be able to get a loan to buy a house? 
Will the interest be "sky high?"
What are some of the other credit effects of filing bankruptcy?

The short answer to your question is that you may be able to finance the purchase a home two years after you have gotten your discharge in bankruptcy, but you may qualify as early as one year after filing Chapter 13, or one year after discharge in Chapter 7. Since a large proportion of home loans depend on FHA or VA loan guarantees, your ability to qualify for those guarantees may determine when you are able to obtain a home loan. FHA will insure mortgages to individuals who have filed Chapter 7 liquidation bankruptcy two years after the discharge if  "the borrower has reestablished good credit (or has chosen not to incur new credit obligations), and has demonstrated an ability to manage financial affairs."

To obtain a loan within one year after the discharge, the borrower must show that "the bankruptcy was caused by extenuating circumstances beyond his or her control and has since exhibited an ability to manage financial affairs and the borrower's current situation is such that the events leading to the bankruptcy are not likely to recur."  FHA regulations also specify that a borrower still in a Chapter 13 debt adjustment who has satisfactorily completed one year of plan payments and gets court approval of the transaction. [U.S. Department of Housing & Urban Development, Office of Housing, Handbook No.: 4155.1 REV-4 CHG-1, September 28, 1995. Chapter 2-3, E]

VA has similar regulations.  The VA handbook for lenders includes provisions that "If the bankruptcy was discharged more than 2 years ago, it may be disregarded." If the discharge was between 1 and 2 years, the guarantee may still be granted if the applicant or spouse has obtained consumer items on credit subsequent to the bankruptcy and has satisfactorily made the payments over a continued period and the bankruptcy was caused by circumstances beyond the control of the applicant or spouse such as unemployment, prolonged strikes, medical bills not covered by insurance, etc.

VA regulations allow granting of the loan guarantee to a person in a Chapter 13 when the plan payments are finished satisfactorily, or after 12 months payments and the Trustee or the Bankruptcy Judge approves of the new credit. [Veterans Benefits Administration VA Pamphlet 26-7, Change 34, November 13, 1997] If you obtain home loan financing with a loan guarantee, the loan rate should be based on the guarantee status of the loan.  As a result, I would not expect that the rate would be affected by the bankruptcy. Other effects of bankruptcy on credit are difficult to assess.  Credit is extended by individual lenders, and is not generally regulated by law.  Lenders do not generally make their criteria public.  We do know that there are two factors which are important to creditors in extending credit.

Ability to make payments
Any lender will want to be sure that you have the ability to pay back a loan before extending you credit.  The discharge in a bankruptcy should improve your ability to make payments.  You will no longer owe the debt that you did when you filed, and you will no longer be subject to judgments, garnishment and other collection activities which would impair your ability to pay back the new loan.  In addition, the restriction against you filing a Chapter 7 for 6 years from the filing of your previous case may give the creditor some assurance of their ability to collect new debt.

Credit history
Lenders look at the way you have paid your bills in the past as an indication of how you will pay your bills in the future.  A bankruptcy is an adverse rating in this respect, but creditors can also see how your credit was before the circumstances which caused the bankruptcy.  If you had a good credit history and paid your bills on time before the bankruptcy, you may find that it is easier to reestablish credit than if you were perpetually behind on your payments and had judgments against you.

Some portions courtesy Doney.net  www.doney.net

What if I filed Bankruptcy and it was dismissed. What is the statute of limitations, the date last paid before the BK or the date of the BK petition to promise repayment. Here is an excellent article that answers just that.

Related: Bankruptcy FAQ | Bankruptcy and your car