After-Effects of Bankruptcy

April 13, 2006

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When concluded, a bankruptcy filing remains on the debtor's credit report for 10 years. However, even the damage to the debtor's credit rating may be mitigated by other factors.

For example, most debtors are unaware that FHA, the federal agency that insures millions of mortgages, has one of the most liberal polices concerning bankruptcy and home mortgages. Generally, the FHA only precludes debtors from obtaining a new FHA mortgage for two years, not 10 years, provided the debtor has an otherwise acceptable credit standing during the two-year period. Because a home is typically the largest purchase individuals make, debtors should realize that financing for a new home may still be available shortly after the bankruptcy action is completed.

It is important to list all debts in a bankruptcy filing, as debts not listed cannot be discharged. However, some debtors retain a credit card with a very low (or no) balance, but a large credit line, by purposely omitting the debt from the filing, to ensure they will have future credit available. On the other hand, many banks periodically check customer's credit reports. If this is done, the card will likely be cancelled anyway.

In addition, any recent shuffling of debt from the card retained to the listed cards is likely to be attacked as fraudulent. This is especially true if it happened in the year leading to the bankruptcy. However, if planned well in advance, and before any financial difficulties arise, an extra card held in reserve will be effective. This card can be used only infrequently, and then only for small purchases, to keep it active. (See our discussion of timing and related issues involving transfers.)