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FAQ'S

Wednesday, September 17th, 2008

by Theodore Sliwinski, Esq.

Credit and Bankruptcy

1. 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. 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.

A consumer credit report may include information on a chapter 7 and chapter 13 bankruptcy for 10 years from the commencement of the case. 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 New Jersey, a court judgment is effective for 20 years. However, it may be renewed at the end of that time. As a result, a renewed civil judgment could be reported for as long as it is effective.

2. Can you still get a student loan after you have filed bankruptcy?

Unlike most extensions of credit the issuance of government guaranteed educational loans are not based upon credit history or income. They are instead extended if you meet the statutory and administrative criteria. Although a default on an existing educational loan may affect your ability to obtain another subsequent loan, the filing of a bankruptcy in itself should not. As a matter of fact, under section 525 of the bankruptcy code the government is restricted from discriminating against those who have filed bankruptcy.

3. How long after filing bankruptcy will I be able to get a loan to purchase a house? Will the interest be outrageous? What is some of the other credit effects of filing for bankruptcy?

The short answer to your question is that you may be able to finance the purchase a home two years after you have gotten your discharge in bankruptcy, but you may qualify as early as one year after filing Chapter 13, or one year after discharge in a 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 a chapter 7 liquidation bankruptcy two years after the discharge if “the borrower has re-established good credit, and has demonstrated an ability to manage financial affairs.”

To obtain a loan within one year after the discharge, the borrower must prove 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.”

The 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. The VA also 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, then 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.

The VA regulations also 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.

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 more difficult to assess. Credit is extended by individual lenders, and is not generally regulated by law. Most lenders do not generally make their criteria public. There are two factors which are important to creditors in extending credit. The main factor is the ability to make payments. Any lender will want to be sure that you have the ability to pay back a loan before extending you credit. The discharge in a bankruptcy should improve your ability to make payments. You will no longer owe the debt that you did when you filed, and you will no longer be subject to judgments, garnishment and other collection activities which would impair your ability to pay back the new loan. In addition, the restriction against you filing a  chapter 7 for eight years from the filing of your previous case may give the creditor some assurance of their ability to collect new debt.

The second major factor is your credit history. Lenders review the way you have paid your bills in the past as an indication of how you will pay your bills in the future. A bankruptcy is an adverse rating in this respect, but creditors can also see how your credit was before the circumstances which caused the bankruptcy. If you had a good credit history and if you paid your bills on time before the bankruptcy, then you may find that it is easier to re‑establish credit than if you were perpetually behind on your payments and had judgments against you.