Bankruptcy and Mortgages
Bankruptcy and Mortgages
Bankruptcy and mortgages are not necessarily forever mutually exclusive.
A personal bankruptcy filing will reduce your FICO score by 130-240 points depending on where your score was to start. A foreclosure will reduce your score by approximately half as much. Notice of the filing will stay on your credit reports for 7 years from the successful completion of your plan in the case of a Chapter 13 Bankruptcy and 10 years from the date of entry of the order for relief or the date of adjudication in the case of a Chapter 7 filing.
Bankruptcy and Mortgages FHA
Consumers who take the proper steps to mend their ways can apply for a new FHA mortgage 1 year after a Chapter 13 bankruptcy. A Chapter 13 bankruptcy is one in which a consumer follows a reorganization plan which typically requires repayment of a fraction of what is owed. FHA rules require a 2 year wait for a new mortgage for those who file the more common Chapter 7 liquidation which discharges all debts that are not specifically exempted. Examples of exemptions include most student loans, debts to the IRS less than 3 years old, child support and alimony, court imposed restitution, fines, penalties, court fees, DWI assessments, proceeds of larceny, punitive damages, fraud, embezzlement, breach of fiduciary duty and debts and cash advances received 60 days or less prior to filing.
Conventional mortgage guidelines from Fannie Mae and Freddie Mac require a wait of 2 to 4 years.
Consumers must first demonstrate responsibility through their timely payments on obligations that report to the credit bureaus such as secured credit cards and such other credit as they can procure.
The waiting period after bankruptcy can be shortened through a hardship letter documenting the filing as a one time occurrence perhaps caused by death of a spouse, serious illness or divorce. Lender guidelines will be a little more lenient on this plea if the borrower can demonstrate responsibility by showing that a high percentage of the debt was repaid through a Chapter 13 repayment plan. Be forewarned that these exceptions are granted only in rare cases.
Almost 70% of bankruptcies are filed under Chapter 7 for complete liquidation of debt.
The decision on whether or not to file for bankruptcy for those who find themselves in financial distress is intensely personal and even agonizing. Each situation is unique and there are frequently conflicting factors pointing both ways. This is the time to search for a lawyer with specialized expertise to help you analyze your personal situation from a professional point of view. Moral considerations that may trouble you may cloud your judgment about making what is really a business decision. Don’t just pick a lawyer you may have gone to school with or who helped you buy your house. Well meaning friends and family may be listened to but the final decision is yours. To help you make the right decision regarding this important and serious matter I recommend a diligent search for a lawyer who concentrates his practice in this area.
Before you start beating yourself up too much with guilt over bankruptcy remember Abraham Lincoln is said to have gone bankrupt twice. He is not the only President with a history including bankruptcies.