This is a widespread myth that is patently false. Like many myths it is a twisting of the facts. The fact is that Chapter 7 Bankruptcy stays on the public records part of your credit report for 10 years, and Chapter 13 for 7 years. This myth derives the wrong lesson from the fact that the public records last 10 or 7 years.
It is your credit score that most lenders look at to determine the likelihood of your repayment, not any particular fact contained on your credit report. I have had my clients buy new houses with their credit two years after bankruptcy on numerous occasions. See Myth “You Will Never Get Credit Again.”
My former clients of course disclose their bankruptcy filing to the lenders that gave them their mortgages. In an economy where on average about 1 million middle class people are forced to file bankruptcy they are too large a force to be ignored in the market. The fact it is on their public record is almost completely ignored in the credit score. The only rule preventing people from buying a house is limited to those using FHA guaranteed loans, and the FHA only requires 2 years after a bankruptcy is filed. You can even refinance your home under FHA guidelines while in Chapter 13 after only 1 year has elapsed.
Banks and others in the lending world would like to have you believe that those who file bankruptcies are shunned for years because they hope to dissuade people from filing—even if it is misinformation. They get some of their most lucrative profits from credit card customers; they are profit driven, and don’t care how deep you’re in the hole financially.
This myth is so engrained into our collective consciousness, even though completely wrong, that it keeps many people from even looking into bankruptcy. They just assume it’s a scarlet letter that will haunt them because it’s been circulated so long it must be true. It’s only when their accountant, a friend who has been through it, or some other concerned and better informed person bring it up that they may consider the option. It’s the hardest myth to dispel even if I show proof to potential clients. Beware this myth that can crush your financial future if you believe it.
