The expected negative financial aftereffects of bankruptcy are often cited as a reason people delay in filing for bankruptcy protection. Many filers believe that the years following a bankruptcy will be credit-free, removing their ability to obtain loans for the seven- to 10-year period that a bankruptcy remains on a credit report. This belief is incorrect and, as many Long Island filers have discovered, financial life after bankruptcy isn’t necessarily all bad.
For many filers, mortgages can be obtained within years of a bankruptcy. Chapter 13 filers can receive Federal Housing Administration mortgages only one year after a bankruptcy is filed, while Chapter 7 filers can receive mortgages from the FHA after two years.
Even standard mortgages are obtainable with a bankruptcy still on a credit report, typically at two to four years after the bankruptcy is filed. The key to receiving a post-bankruptcy loan is in reestablishing credit as soon as possible by paying bills on time and by taking out a secured credit card where possible. The waiting period may even be shortened with the help of a hardship letter explaining any once-in-a-lifetime causes of the bankruptcy that would not affect the filer’s future financial management such as divorce or hefty medical bills.
Chapter 13 reorganizations are generally easier to recover from than Chapter 7 liquidation bankruptcies. This is because the filer is still paying back the debts incurred, albeit at a reduced rate. However, about 70 percent of bankruptcies are of the Chapter 7 variety, so most borrowers can expect a wait of several years after filing before being able to successfully secure a new mortgage.
A bankruptcy will typically reduce credit ratings by between 200 and 350 points and FICO credit scores by between 130 and 240 points. Using secured credit cards regularly, and paying them off early can raise scores steadily, allowing the filer to eventually obtain necessary loans.
Financial life after a bankruptcy can be difficult, but it’s not impossible to obtain credit when needed. The first year or two are the hardest, especially after a Chapter 7 filing, but with time and good financial habits, a bankrupt individual will be able to operate normally financially, without the burden of the debt load that caused the bankruptcy in the first place.
Source: The New York Times, “Life After Bankruptcy,” Vickie Elmer, Sept. 13, 2012