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| Credit after bankruptcy |
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It is a very common question in any debtor's minds that whether he/she will be eligible to get credit after a
bankruptcy. The questions that come in the minds of the debtors are:
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Credit Cards
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Most credit card companies will allow his client to keep their credit card for use after bankruptcy.
If the credit card holder owes money at the time filing bankruptcy, credit card holder must list the
card as a debt. It must be remembered by any credit card holders that the schedules are filed under penalty of perjury. Perjury in connection with case can lead to denial discharge of all credit card holders' debts. It is also a federal crime.
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If credit cardholders don't owe anything on the card, cardholders don't have to give
the credit card companies, notice of bankruptcy. But in case the credit card companies
find out the news of bankruptcy of any particular cardholders they may cancel the
card as a precaution. On the contrary it is seen that most credit card companies
allow credit card holders to keep their credit card for use after a bankruptcy, if the
cardholders agree to reaffirm the balance on the card and want to enter into a new
agreement, signed after the bankruptcy filing. The decision is solely in the hands
of the creditors, but generally it is seen that most creditors want to avoid the loss
incurred when the debt is discharged, and want future business.
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New Credit after Bankruptcy
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| Today we live in a competitive economic atmosphere,
where competition is going on head to head, lenders are not free from it. So they lend money to those who
are recently bankrupt. It may be expensive than before, and available with lower limits, but nevertheless
the loans will be offered. A secured credit card is usually available post-bankruptcy at lower rates than unsecured cards.
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| Rebuilding credit worthiness after facing bankruptcy is a matter
of obtaining a toehold in the credit world and treating that credit with a respective manner. So it is important for debtors
to use credit cautiously at the time of bankruptcy.
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Gathering information from people's trash, also known as 'dumpster diving',
is also effective for criminals intending to perpetrate the even more hard-to-catch identity fraud.
'Identity theft' describes when someone uses your personal information, such as your name and
Social Security number, to either take over current credit accounts or open new ones using your
identity. An identity thief might also rent an apartment, take a job, or even commit crimes using
your name, but the identity fraud generally involves using your good credit rating without your knowledge.
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Buying a Home after Bankruptcy
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| According to various surveys
conducted it is clear that after 18-24 months of a bankruptcy discharge, persons can qualify for a
loan on the same terms as if they are not bankrupt and did not file any bankruptcy. Generally after
filing Chapter 13 the person is qualified to obtain a loan after one year and in case of Chapter 7
bankruptcy it is after one year of discharge.
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| 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."
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| Practically a person may be able to finance
the purchase of a home two years after he/she has the discharge in bankruptcy. Since a large proportion
of home loans depend on FHA or VA loan guarantees, the person's ability to qualify for those
guarantees may determine when he/she is able to obtain a home loan.
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| 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". 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]
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| 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 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.
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| 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]
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| If the borrower obtains home loan
financing with a loan guarantee, the loan rate should be based on the guarantee status of the loan.
As a result, the rate will not be affected by the bankruptcy.
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| 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. But it is known fact that there are mainly two factors,
which are important to creditors in extending credit.
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Payment Ability
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| Any lender will want to be sure that the borrower have
the ability to pay back a loan before extending the credit. The discharge in a bankruptcy should improve the
ability to make payments. The borrower will no longer owe the debt that as before filing and as a result the
borrower will no longer be subject to judgments, garnishment and other collection activities, which would
impair the ability to pay back the new loan. In addition, the restriction against the borrower filing a Chapter
7 for 6 years from the filing of the previous case may give the creditor some assurance of their ability to collect new debt.
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Credit history
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| Lenders look at the way a
borrower have paid his / her bills in the past as an indication of how in future the
said borrower will pay the bills. A bankruptcy is an adverse rating in this respect,
but creditors can also see how the credit was before the circumstances, which
caused the bankruptcy. If the borrower had a good credit history and paid the bills
on time before the bankruptcy, he /she may find that it is easier to re-establish credit
than if the said borrower was perpetually behind on his / her payments and had adverse judgments.
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| Effect of Bankruptcy on Credit Report
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| It can be said that bankruptcy is no less harmful than
the facts, which leads to a bankruptcy filing. Most debtors in bankruptcy proceedings, even those who have
never missed a payment, couldn't get new credit from a lender who truly looked at their financial condition.
So the fact that there are no negatives on their credit report is only marginally meaningful when looking at the whole picture.
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| Bankruptcy at least makes all the debt shown
in the negative history unenforceable. Objectively, a debtor is a far better credit risk after bankruptcy
than before. Subjectively, credit managers are individuals who may not understand bankruptcy or look
beyond its negative aspects. It is to be remembered that a bankruptcy is not going to erase the record
of the debts listed in any person's bankruptcy.
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