Most people rely on credit for basic financial concerns. Credit cards help households cover unexpected expenses. Auto loans and mortgages make substantial purchases achievable for many families.
The decisions that people make can potentially limit their credit opportunities. For example, filing for personal bankruptcy can result in an immediate loss of revolving lines of credit. Lenders typically close accounts as soon as people file for bankruptcy.
Anytime the filer applies for a loan in the future, they may worry that the record of their bankruptcy might prevent them from getting credit. Credit report blemishes can also lead to sub-optimal credit terms, such as upfront fees and higher interest rates.
How long can the record of a personal bankruptcy limit the credit opportunities of a person who files?
New credit is available within months
For most people who successfully complete bankruptcy and secure a discharge, credit becomes available again relatively quickly. Credit card companies, in particular, often start sending offers to those who have recently completed bankruptcy. Lenders recognize that those people likely need credit to cover basic expenses and that they are ineligible to file for bankruptcy again for multiple years.
As people use their new lines of credit responsibly, the options available to them improve. Many people with bankruptcy on their record can qualify for a car loan or a mortgage within a few years of their discharge. The more time passes and the more someone establishes a positive credit history, the quicker it is for them to rebuild their credit score and obtain better credit opportunities.
Bankruptcy is a temporary credit blemish
Lenders, employers and landlords may look at an individual’s credit history when deciding whether to extend them an opportunity. Like every other negative mark on a credit report, bankruptcy does eventually come off of the credit report of the filer.
A Chapter 7 bankruptcy remains on a credit report for 10 years, which is longer than most other credit blemishes. A Chapter 13 bankruptcy rolls off of a credit report seven years after the discharge. At that point, potential lenders and employers no longer have access to the record of the bankruptcy to hold it against the person who filed.
Learning more about the rules that apply to personal bankruptcy filings and credit reporting can help people rebuild their finances after a discharge. The record of a bankruptcy is only a temporary issue that matters less as time passes.