A bankruptcy can harm a debtor’s credit report and complicate their ability to obtain loans. But, a Chapter 7 bankruptcy does not always prevent the ability to reestablish credit or purchase a home. A Chapter 7 bankruptcy involves the liquidation of many types of assets and the discharge of most debts. It stays on a credit report for 10 years after a debtor files for bankruptcy.
A Chapter 13 bankruptcy requires the repayment of some debts. This bankruptcy remains on credit reports for seven years. Bankruptcy has the strongest impact on credit reports for up to the first two years after filing. A debtor can diminish the impact of bankruptcy on credit reports, however, by building a positive credit history. Obtaining credit cards and making full and timely payments, for example, helps re-establish credit.
After a Chapter 7 bankruptcy, a debtor must usually wait four years after the bankruptcy’s discharge to qualify for a conventional loan that is not insured by the government. This period typically applies to an FHA, USDA or other government-backed loans.
Extenuating circumstances involved with the bankruptcy, such as job loss or illness, can also help increase the odds for loan approval. A letter with supporting documents should be provided as part of the loan application process for these circumstances. After the end of the 10-year period, a debtor should verify the removal of the bankruptcy from their credit report. Free copies of credit reports may be obtained from the three credit bureaus at AnnualCreditReport.com. Debtors can ask them to remove the bankruptcy if it erroneously remains on reports.