There are many reasons why people who might benefit from bankruptcy are hesitant to file. In some cases, people worry about social stigma. They don’t want their neighbors or employers to learn that they have struggled financially.
Other times, plans for the future can be the main reason why people have a negative opinion about the prospect of personal bankruptcy. They know that bankruptcy drags down their credit score and diminishes their credit options.
Particularly if they dream of eventually buying a home, they may convince themselves that trying to address their debts gradually over time is a better solution than filing for personal bankruptcy. Despite what many people believe, bankruptcy does not prevent filers from eventually qualifying for a mortgage and buying a home.
Credit reporting limitations apply to bankruptcy cases
If the credit bureaus could report bankruptcy indefinitely, then there might be some validity to the anxiety of aspiring homeowners. However, there are clear rules limiting the duration of credit reporting after a bankruptcy filing.
How long the credit bureaus can report an individual’s bankruptcy discharge depends on what type of bankruptcy they pursue. Chapter 7 bankruptcy is a relatively fast process. People may be able to secure a discharge in a few months. The record of that discharge can remain on their credit report for a full 10 years after their filing, which is longer than the limit imposed on most other credit issues.
Those who file for Chapter 13 bankruptcy are only eligible for discharge after completing a repayment plan. They spend anywhere from three to five years making monthly payments toward their debts. Typically, the credit bureaus only report Chapter 13 discharges for seven years, which is the standard reporting limitation for most credit blemishes.
Bankruptcy’s impact decreases with time
People don’t necessarily need to wait for bankruptcy to come off of their credit report to qualify for a mortgage. Those who are assertive about rebuilding their credit after their discharge might be able to qualify for mortgages two to three years after they’re discharged.
The more time that passes and the more the filer focuses on establishing a positive credit history, the easier it may be for them to secure a mortgage with reasonable terms before the credit bureaus stop reporting their discharge.
Learning more about the myths surrounding personal bankruptcy can help people take charge of their finances. People who eliminate major financial obligations can potentially improve their credit scores and qualify for better mortgages than those who continue carrying extensive personal debts for years.