Bankruptcy is a resource that exists to protect the interests of people who are experiencing financial hardship. A bankruptcy filing ends collection activity and can lead to a discharge of certain debts.
Yet, despite how useful bankruptcy can be, many people will do just about anything to avoid bankruptcy. They believe in the myths that people share about bankruptcy and want to protect themselves from lingering financial burdens. For example, many people claim that bankruptcy keeps someone from obtaining and using credit. If someone dreams of being a homeowner or already owns a home and would like to sell it to buy a different one, they need to be able to qualify for a mortgage.
Is it true that someone who has filed for bankruptcy will not be able to obtain financing for a home purchase in the future?
The effect of bankruptcy decreases over time
It would be accurate to say that most individuals who file for bankruptcy will not qualify for a mortgage shortly after their discharge. Bankruptcy drags down people’s credit scores by hundreds of points and leads to lenders closing or freezing accounts so that they can’t continue spending on credit.
Although people can qualify for some forms of credit in the months after a bankruptcy filing, they will usually only be able to obtain high-cost car loans or secured credit cards that require a financial deposit. A mortgage usually will not be an option in the first year or two after a bankruptcy filing.
However, people may be able to obtain mortgages and other higher-value lines of credit within a few years of their bankruptcy discharges. The terms that lenders offer will typically reflect their sub-optimal credit report. The impact that a bankruptcy has on someone’s creditworthiness will decline a bit every month that they make payments on new lines of credit.
As the bankruptcy gets older, people will become eligible for better and more competitive credit options. Eventually, bankruptcy will come completely off of someone’s record. A Chapter 7 filing falls off of someone’s credit report 10 years after their discharge, while a Chapter 13 bankruptcy disappears seven years after the courts grant a discharge. At that point, a prior bankruptcy will no longer have any bearing on whether or not someone can qualify for a mortgage or other lines of credit.
Seeking legal guidance and learning the truth behind common bankruptcy myths can help people struggling financially choose informed ways to resolve their current financial struggles.