Credit After Bankruptcy

How long may bankruptcy information be included in my credit report after bankruptcy?

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

  • credit transactions 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 affect 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.

How long after filing bankruptcy will it be until I will 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 questions is that you may be able to finance the purchase of a home two years after you have gotten your discharge in bankruptcy, but you 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 re-established 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.