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There are lots of people who are struggling with their debt who see bankruptcy as a viable way of getting out of a bad financial situation. While it's true that there are situations where bankruptcy is the only option, it's not a choice to be made lightly once you consider all the long term implications.
It might not seem like it at the moment, but there's a good chance you'll still want or need to attain new credit in the future. While you might avoid credit cards and other high interest and/or unnecessary credit - a car, a home, leasing, renting; all these things are affected by your credit score.
When a lender is deciding on whether or not they should provide credit to a borrower, there are three main things they traditionally look at:
- Your current income to debt ratio
- Your fiscal stability
- Your payment history with other creditors
There are other factors of course, but the three aforementioned items are a good indicator of whether an individual will be able to make timely payments. With a bankruptcy on your credit history, you can imagine how your stability and payment history might be perceived by potential lenders.
Your credit history will include data on your bankruptcy for up to 10 years after a completed filing. Because your report is what your credit-worthiness is based off, it can be extremely difficult to attain new credit following a Chapter 7 or 13.
If and when you start to re-establish your credit, you still may end up paying "high-risk" rates on everything from credit cards to home loans.
Though it's not impossible to qualify for a home loan following a bankruptcy, it is more difficult. Private lenders will put the individual borrowing under heavy scrutiny except in a case when the bankruptcy is far in the past and credit has been outstanding since. Even so, it's rare to get the same rates as someone with an identical credit score and a clean history.
FHA loans (Federal Housing Administration) typically require the borrower:
- Has built up (at the very least) 2 other credit accounts since the bankruptcy, which need to be kept in perfect standing.
- Has waited a period of at least 2 years after discharge for a Chapter 7 bankruptcy or one year following a Chapter 13.
VA loans (U.S. Department of Veterans Affairs) typically require a 2 year period of solid credit after discharge as well, though certain circumstances are more likely to be factored in.