Many people think that filing for chapter 7 bankruptcy means that you will not have access to credit again for at least 10 years. This could not be further from the truth! Not only can you get credit after filing for bankruptcy, in some instances it is actually easier to do so. (In fact, you can even get student loans in most cases and go to college after bankruptcy!)This is because a debtor can only file for Chapter 7 bankruptcy a second time eight years after their earlier Chapter 7 case was closed.
This means that any new debt accumulated will remain owed to the lender for at least eight years and this debt is enforceable. Further, lender’s offering credit to people after they file for bankruptcy – and do – charge considerably higher interest rates and require higher monthly minimum payments. Since most borrowers expect this if they have a bankruptcy on their record, most are willing to accept terms that would otherwise be viewed as draconian. For this reason, getting and after bankruptcy credit card is fairly easy.
According to a paper by the Federal Reserve Bank of Boston*, ninety percent of people who have filed for bankruptcy have some form of credit within eighteen months of the closure of their case. Seventy-five percent of people in fact have fully unsecured credit, like regular credit cards, within eighteen months of the bankruptcy case being closed. Similarly, twenty-four months after a bankruptcy case is closed, a person becomes eligible for mortgage loans from the Federal Housing Administration (FHA). Many people are surprised that you can get a mortgage after bankruptcy!
Although a bankruptcy remains on your credit report for ten years after the case is closed, in many cases the negative effects of this are largely gone after two years, assuming the individual has maintained excellent credit practices since filing for bankruptcy.
The same paper by the Boston Federal Reserve shows that the people with the worst credit histories – those whose credit quality profile suggests they are the least able or willing to pay back debt – are specifically the ones the receive the most aggressive offers by lenders. The large monthly payments, high interest rates make the initial loan worth the risk and since the person cannot file for bankruptcy again for at least eight years, those that accept these terms turn out to be good investments for the lenders. This combination of higher returns received over shorter periods of time with no possibility of getting the debt discharged makes people who have recently filed for bankruptcy prime targets for aggressive lenders.
However, it should be noted that these facts are directly related to the amount of credit being offered by the overall industry. It was much easier to get credit after filing for personal bankruptcy in the era of “cheap credit” that came to an abrupt end in 2007 than it has been since. Nevertheless, assuming that credit does become easier in general, it will also become easier for people with bankruptcy on their record.
* Ethan Cohen-Cole, Burcu Duygan-Bump, and Judit Montoriol-Garriga, “Forgive and Forget: Who Gets Credit after Bankruptcy and Why?” QAU Working Paper No. QAU09-2. Federal Reserve Bank of Boston, http://www.bos.frb.org/bankinfo/qau/wp/2009/qau0902.htm
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