One of the top concerns of people’s lists when filing bankruptcy is how does bankruptcy affects credit. While it may seem illogical to some people, it is a valid concern that a person would be worried about getting back into credit after filing bankruptcy to get rid of debts you cannot pay.
For most individuals, it is impossible to live without using some credit. We use credit to purchase our homes and vehicles. We also use credit for emergencies and sudden expenses. People even use credit to pay for school tuition, books, and purchase interview suits/work clothes for their first jobs.
Because most people do not have access to large sums of money, credit is necessary to finance. Therefore, being worried about how filing bankruptcy affects credit is perfectly normal. So, how does bankruptcy affect credit?
Filing Bankruptcy – The Immediate Effect on Credit
When you file a Chapter 7 or Chapter 13 bankruptcy case, you cannot incur any new debts while in the bankruptcy case without bankruptcy court approval. Your credit card companies receive notice of the bankruptcy filing. The companies close your credit accounts based on the bankruptcy filing.
Therefore, you do not have access to credit during the bankruptcy case. When you complete your bankruptcy case, you can begin using credit again. However, the credit that might be available to you could come at a very high price.
Most people exiting bankruptcy within months of their case being close can qualify for a credit card. However, lenders charge higher interest rates based on the bankruptcy filing and your credit score. Therefore, your credit is going to cost you more to use.
Do not worry. This situation is temporary. There is life after bankruptcy, and you will have credit again.
We have some great articles about credit after bankruptcy that might provide more information:
- Getting A Credit Card After Bankruptcy
- Life After Bankruptcy – Rebuilding Credit And Renting
- Getting a Loan After Bankruptcy
The most important thing to remember is that you will be able to get credit after bankruptcy. Just make sure that you are financially prepared to handle credit again and that you use the information you learned in your bankruptcy courses to help you manage credit effectively.
How Long Do You Have to Wait to Buy a House After Bankruptcy?
Your bankruptcy filings remain on your credit reports for seven to ten years after the date of filing. However, that does not mean that you must wait until the bankruptcy cases fall off your credit reports to buy a house after bankruptcy.
The main requirements for buying a house after bankruptcy is whether you can afford the mortgage payments and have you been able to save enough money for a down payment. Those are the same two requirements that anyone faces when they purchase a home.
Another consideration is your credit score and debt-to-income ratio. Again, those are two of the same factors that influence all applications for mortgage loans, regardless of whether the person has a bankruptcy filing on his or her credit report.
The main difference in buying a house after bankruptcy is the mandatory waiting period required for certain loans.
Most government-backed loans have a mandatory waiting period for eligibility after a bankruptcy filing. For instance, a standard FHA loan generally has a two-year waiting period after a person receives a bankruptcy discharge. However, that waiting period could be as little as one year in some cases.
VA and USDA loans also have waiting periods. Still, those periods can be reduced if you can prove you filed bankruptcy because of extenuating circumstances and maintained good credit after filing your bankruptcy petition.
Private lenders issue conventional loans without government backing. You can buy a house after bankruptcy with a conventional loan in two to four years after your case is closed if you meet all other requirements for the loan. As with government-backed mortgages, the waiting period could be shorter if there were extenuating circumstances that prompted the bankruptcy filing.
Non-conventional lenders do not have waiting periods to buy a house after bankruptcy. However, these lenders charge unreasonable fees and interest rates. It is generally best to work on improving your credit score and saving money for a larger down payment than to work with a non-conventional lender to buy a house after bankruptcy.
How Soon Will My Credit Score Improve After Bankruptcy?
The good news is that you could see your credit score improve after bankruptcy in as little as one year. The rate at which your credit score improves after bankruptcy depends on numerous factors. However, because a bankruptcy case gets rid of most, if not all, your unsecured debts, it triggers changes in your credit report that can improve your credit rating.
For example, when your unsecured debts are wiped out, it improves your debt-to-income ratio, which can improve your credit score after bankruptcy. It also stops negative information from being reported on your credit report. Past due balances are canceled, so no more over-the-limit accounts that hurt your credit score before bankruptcy.
The steps you take after bankruptcy also impact how quickly your credit score improves after bankruptcy. If you have a mortgage or car loan, continue to pay those payments on time each month to improve your score. Also, after your bankruptcy case closes, consider a secured credit card to help you begin rebuilding credit after bankruptcy.
The best way to improve credit scores after bankruptcy is to pay all bills on time and give yourself ample time to recover from bankruptcy. Work on improving your overall financial stability, and your credit rating will improve.
The Consumer Financial Protection Bureau, Federal Trade Commission, and USAGov have information on their websites about repairing credit scores that you might find helpful.
If you have questions about filing bankruptcy to get rid of debts, Ascend can help. Use our free debt relief calculator to compare your debt settlement options. You may also want to check out our Savvy Debt Payoff Planner to explore ways to get rid of debts without filing bankruptcy.
