Buying a Home after Bankruptcy
In 2008, more than 1.1 million Americans filed for bankruptcy, a 32 percent increase from the year before, according to the Automated Access to Court Electronic Records. As the U.S. attempts to recover from an economic recession, a credit crunch has created a few hiccups as lenders tighten up credit standards for loan applicants across the board.
Bankruptcy doesn’t mean the end of the dream
Filing for bankruptcy is not the financial disaster that sweeps away your credit freedom for the rest of your life. But getting your credit back on solid ground takes diligence and discipline.
Bankruptcy can offer a fresh start to individuals with overwhelming debt who are seeking ways to brighten their financial horizon. But, improving your credit standing, like diminishing your credit standing, happens over a period of time.
While bankruptcy remains on credit reports for years, if you maintain a good credit history after filing for bankruptcy some lenders often times extend credit for auto and home loans 18 to 24 months after a bankruptcy discharge.
For home loans, FHA guidelines require two years with a clean payment history subsequent to the bankruptcy and the establishment of new credit. All credit after a bankruptcy is considered new, so any accounts you don’t include may help you meet this criteria.
The two types of Bankruptcy
For individuals, there are generally two kinds of Bankruptcy.
Under Chapter 7, also referred to as “liquidation bankruptcy,” you pay nothing to unsecured creditors, but may be required to liquidate non-exempt assets (like a house or car worth more than a certain amount).
Note: If you currently own a home and have to declare bankruptcy, the lender will ask the court to “remove” the home from the bankruptcy so they can proceed with foreclosure. In the future a lender will view this as both a bankruptcy and foreclosure. Check out our Free Report on Foreclosure vs Short Sale (www.homebuyerhelpnetwork.com) for more information.
Chapter 13, often called a “wage-earner’s plan,” means you pay back a portion of your debts over a period of time and are not required to liquidate assets. The recent revisions in the bankruptcy laws “essentially” require that if you have a job you will probably be forced to file Chapter 13. Consult with an attorney to determine the option that most applies to your individual situation.
Recovery – The first six months
The most damage to your credit will be immediately after you file, says Candy Wright, group manager of counseling at GreenPath Debt Solutions (www.greenpath.com), a non-profit consumer-counseling service. “If you have accounts that you’re not including, like a mortgage, that will actually help your credit over time if you keep your account current.”
Next, be prepared to spend up to six months awaiting bankruptcy discharge, which releases the debtor from personal liability for some or all of his or her debts. During this time, creditors are notified and given time to respond to your bankruptcy claim. You should not pursue any new credit during this period.
Recovery – 6 months to 1 year
Your credit history won’t clear up immediately — even if you’re current on your bills, it will take several months for your credit to improve on paper.
“After six months to a year, if you’re in good standing, then you will establish a track record of turning yourself around that will be reflected in your score,” says Director of Consumer Education Steve Katz of TrueCredit (www.truecredit.com), a credit monitoring agency. “Keep in mind the impact of bankruptcy is a lot of late payments, and if you have a foreclosure you might still be accountable for that mortgage and those things can linger on for quite awhile.”
If you re-affirm debt, or agree to repay a portion of a debt, the positive effects of repayment will begin to show up on your credit report. If not, rental payments or other types of credit that are reported to credit bureaus may have a positive impact as you re-establish your credit.
Note: Within a few weeks of discharge, request a free copy of your credit report. https://www.annualcreditreport.com/cra/order AnnualCreditReport.com is the ONLY authorized source to get your free annual credit report under federal law.(FTC)
Many creditors are reluctant or just slow in reporting debts that were discharged in bankruptcy.They continue to report any debts as outstanding or still delinquent. This can be a huge drain on your credit score. Any debts that were discharged and still show as unpaid or delinquent are being reported in error. Using the dispute process provided by each of the three credit bureaus (Experian, Equifax,TransUnion) will allow you to get these reported correctly which will “clean up” your report and improve your credit score. You will probably be required to submit a copy of your bankruptcy papers to the bureaus, so make plenty of copies.
Note: When you are ready to apply for a home loan, your lender will ask for a copy of the bankruptcy papers, including schedule of debts and discharge, so keep a copy for them.
As you begin to rebuild your credit, it’s important to track your credit history and remain in good standing.
“It’s kind of like your report card from school, so you want to try to always improve your score,” says Ralph R. Roberts, a bankruptcy and foreclosure expert and creator of www.KeepMyHouse.com. The way to improve: Pay on time, every time.
The First Year and Beyond
Each year after the first has less of an impact on your credit history. However, bankruptcy will stay on your credit report for 10 years.
For that period of time, any lender viewing your credit report will see an indication that you filed for bankruptcy and may take that into consideration before extending a line of credit.
If you become more financially healthy in the seventh year, for example, it will have less of an impact than the 1st or 3rd year of bankruptcy.
The unedited version of this article can be seen at: http://www.frontdoor.com/Home-Finance/Recovering-From-Bankruptcy/54707
YOU CAN RECOVER!
All health care professionals will tell you that a patient’s attitude and willngness is the key to every successful recovery. The same is true for bankruptcy, your credit and becoming a homeowner.
Your credit requires a lifetime of maintenance, and while bankruptcy is a major roadblock, worry less about a timetable and more about weathering the financial storm by relying less on credit cards and survive by living a debt-free lifestyle.
IT’S TOO IMPORTANT…DO IT RIGHT!
Greg Cook
First Time Homebuyers Network
phone: 951-265-4532
fax: 951-699-7813
email: greg@homebuyerhelpnetwork.com
website: www.homebuyerhelpnetwork.com
