Filing for bankruptcy and having debts discharged or paid off give a lot of people a fresh financial start in life. However, bankruptcy does have drawbacks, and one of the biggest ones is the impact on credit score.
The extent of this impact, and the specific effect it has on your ability to apply for credit, depends on whether you filed for a Chapter 7 bankruptcy or Chapter 13 bankruptcy.
Chapter 7 Discharge
Chapter 7 is the most common form of bankruptcy. The court places an automatic stay on current debts, which stops creditors from attempting to collect payment. Much of the debtor’s property will be liquidated and the proceeds will be used to pay creditors. After a period of four to six months, the court generally discharges any remaining debts.
After your bankruptcy has been discharged, it should show up on your credit report. It remains there for up to 10 years.
After your debt is discharged, there’s generally no waiting period to apply for a credit card. However, that does not mean your application will be accepted, because bankruptcy has a lasting effect on your credit score.
There are two types of credit cards – secured and unsecured. Secured credit cards require a cash deposit by the cardholder, in case the cardholder starts to have trouble making payments. Unsecured credit cards, which are the most common ones, have no security deposit.
Generally, after a bankruptcy discharge, you’ll have some difficulty getting credit card applications approved. However, keep trying, and you should be successful with a secured card.
Another option out there is unsecured credit cards. While most traditional unsecured credit card lenders will not approve your application shortly after a bankruptcy discharge, there are a few that will.
These, however, come with low credit limits, high risk, and high fees. For example, annual percentage rates can approach 30 percent, and annual fees can exceed $100 a year. For someone who’s had debt problems in the past, and just had their bankruptcy discharged, you may want to avoid these.
So consider focusing on obtaining a secured credit card. This is because using one, and successfully managing credit by paying your monthly bill on time, is key to rebuilding your credit. You’ll need an improved credit score for other traditional non-secured credit cards and some mortgages.
After discharge, there are waiting periods before applying for a mortgage is possible. The table below shows the lengths of the waiting periods for different types of standard loans. Note that some mortgage applications have shorter waiting periods if there are extenuating circumstances. These may be issues like divorce, loss of a job, or other unanticipated events.
|Loan Type||Chapter 7 Waiting Period||Waiting Period With Extenuating Circumstances||Comments|
|Conventional||4 years||2 years||Non-government loans following Fannie Mae and Freddie Mac guidelines|
|FHA||2 years||1 year||Loans insured by the Federal Housing Administration|
|VA||2 years||2 years||Loans backed by the U.S. Department of Veterans Affairs|
|USDA||3 years||3 years||Loans in rural areas backed by the U.S. Department of Agriculture|
Note that many of these loans may have minimum credit scores as well.
One final option is a non-qualified mortgage (non-QM). This is a mortgage offered that does not fall within federal guidelines. These loans may be risky and likely are more expensive – caution is advised.
Chapter 13 Discharge
Under Chapter 13, the filer enters into a repayment plan where they repay their debt to creditors over a period of three to five years. Once the last payment is made, then the bankruptcy will be discharged.
After this, the discharge should show up on your credit report. It remains there for up to seven years.
Chapter 13 filers who have had their bankruptcy discharged face the same challenges to getting a credit card as Chapter 7 filers.
The following table presents the waiting times for standard mortgages.
|Loan Type||Chapter 13 Waiting Period||Waiting Period With Extenuating Circumstances|
|Conventional||2-4 years||2 years|
|FHA||1 year||1 year|
|VA||1 year||1 year|
|USDA||1 year||1 year|
The waiting period for a conventional loan can be complicated. Further discussion with a conventional loan lender is recommended. As discussed above, non-QMs are also an option.
Credit Application Experts
If you’ve had your bankruptcy discharged, and are having trouble getting credit or repairing your credit, contact a bankruptcy lawyer today. Fill out our free evaluation, and a local bankruptcy attorney will be in contact to help you move forward with your financial future.