Declaring bankruptcy makes you feel like you could never regain your previous financial position. However, the bankruptcy record is not permanent. With the guidance of a competent bankruptcy attorney, you can find ways to purchase a home after filing. How do you buy a property, and what duration will you wait before you can borrow alone? The answers to these questions are discussed below.

Understanding Bankruptcy

Bankruptcy refers to a legal process that gives debtors a path to relief from debts they cannot pay and debt management to help them pay creditors from the debtor's non-essential property.

Declaring bankruptcy is not an easy decision. When experiencing a financial crisis, you could be led to think that it is the only way to obtain monetary relief and manage your debt. Nevertheless, you must explore other alternatives because filing will adversely affect your future life. Again, bankruptcy does not repay all your debts. You cannot eliminate some debts under the American Bankruptcy Code. Some of the non-dischargeable debts that will not be eradicated even after bankruptcy are:

  • Student loans
  • Child support
  • Secured debts
  • Income taxes
  • Debts linked to DUI crashes

Bankruptcy is a criminal record accessible to the public. Potential employers and creditors can see it when they run background checks. Some individuals view bankruptcy as creditworthiness and a lack of capacity to repay debt. When looking for a job whose responsibilities focus on finances, a bankruptcy record could see you discriminated against even when you satisfy all other requirements.

Filing for bankruptcy also means losing most of your properties, including your home. Also, a record of the filing will affect your credit score as it appears on your credit statement. Your credit score determines whether you qualify for credit, the amount you qualify for, and the interest rate. Declaring bankruptcy drops your credit score, and whenever you have to borrow money in the future, you will borrow less and repay at high interest. Some lenders will entirely deny you credit because of the low score.

Whether or not you will retain your home after bankruptcy depends on the type of bankruptcy you file. Therefore, speak to your bankruptcy attorney to evaluate your options when filing to avoid the severe consequences associated with the debt relief procedure.

Before deciding to file, speak to your attorney to establish your filing options, the best bankruptcy type depending on your circumstances, and the kind of debts you want to eradicate through the legal procedure.

Bankruptcy Types

When declaring bankruptcy, you have four options depending on the chapter of the U.S. Bankruptcy Code under which you want to file. These Chapters are:

Chapter 7

Otherwise called liquidation, Chapter 7 bankruptcy is a legal procedure supervised by the court. The court appoints a trustee to liquidate or sell all your non-exempt assets and use the proceeds to compensate creditors. If, after exemptions, you have no assets to liquidate, you will not repay unsecured debts.

Before filing for liquidation, you take a "Means Test" to establish your eligibility for debt relief under the chapter. You will undergo two credit counseling sessions and an audit. If your income exceeds the average figure in the Means Test, you are ineligible for bankruptcy filing under this chapter.

Chapter 11

A bankruptcy filing under Chapter 11 helps businesses and organizations continue their operations as they develop a court-approved structure or plan to repay what they owe. As a debtor under this chapter, you must file a reorganization plan and furnish your creditors with a disclosure report with sufficient details necessary to review the reorganization plan. The court will then approve or disapprove of the plan. When the court agrees, you will repay part of your debt obligations and discharge the balance. The goal is to consolidate debt, reduce it, and restructure the business.

Chapter 12

Chapter 12 is the bankruptcy plan for farmers and fishermen. It offers financial relief to these parties undergoing financial crisis by allowing the crafting and implementation of a plan for full or partial debt repayment. Debtors under this chapter have a regular annual income, present a repayment schedule to creditors, and make payments in installments for 36 to 60 months.

Chapter 13

Also called the wage earner's plan, Chapter 13 encompasses monthly debt payments through a court-approved plan by debtors with steady earnings or who are ineligible for liquidation. It is available for people who want to retain their property after bankruptcy but have insufficient income or need more time to repay.

The advantage of this bankruptcy is that it puts you under automatic stay. For the plan's duration, usually 36 to 60 months, no creditor can contact you or engage in debt collection activity. Also, you retain all your property like home, car, and boats, and at the end of the procedure, more debt is discharged than when obtaining relief through liquidation.

Your Option for Purchasing a Home with a Bankruptcy Record

Once you have declared bankruptcy, it is expected to have concerns about how you will buy a house after the dismissal of your debt. Your credit score is low now, and many lenders are unwilling to give you money. Luckily, even with the record, you can buy your dream home.

Before obtaining a mortgage, you should wait for the court to dismiss the bankruptcy petition.

However, how long will it take for the dismissal to happen?

The waiting period hinges on the chapter under which you filed for bankruptcy and the loan you seek.

Mortgage Options After Liquidation or Chapter 13 Bankruptcy

Some creditors will be willing to extend your credit immediately after bankruptcy. To receive a mortgage for a home, evaluate the available options from various lenders. Each mortgage will have different rules, depending on the bankruptcy chapter.

Federal Housing Authority (FHA) Loans

The rules for FHA loans vary depending on whether you were liquidated or declared Chapter 13. If you filed Chapter 7, you will have a minimum of 24 months after the debt dismissal to qualify for this housing loan. If you are interested in a non-FHA mortgage, you will wait at least months after the bankruptcy is discharged by the court to qualify based on the conditions set by the bank where you seek the loan. However, you should expect strict qualification conditions for FHA mortgages after liquidation.

Obtaining a FHA mortgage to purchase a property after a Chapter 13 discharge will be much easier. The reason is that under the chapter, you must develop a debt reorganization plan that must obtain the court's approval before it can take effect, unlike under liquidation, where the court-appointed trustee sells your non-exempt assets to repay creditors. The restructuring plan under Chapter 13 allows you to reduce debt and develop a 36 to 60-month plan to repay the balance. With the restructuring under this chapter, you are eligible for an FHA mortgage twelve months after bankruptcy discharge if you have been consistent with the repayment plan.

Your timely payment of the debt obligation per the plan or the goodwill you have earned determines whether your creditors will be ready to lend you money. The bankruptcy administrator and the court will be the determining factors in deciding whether you qualify for the mortgage. They will determine if you can handle another financial obligation.

Conventional Loans

After declaring bankruptcy under Chapter 7 (liquidation) or Chapter 13, you qualify for conventional mortgages from government-affiliated entities like Freddie Mac. However, because of the strict restrictions of these companies, you will have to wait several years to be eligible. If you have a liquidation bankruptcy discharge, you will wait for 48 months to be eligible, while after a Chapter 13 discharge, you only wait for 24 months.

Veterans Administration (VA) Mortgages

VA mortgages have fewer stringent restrictions than conventional ones. The waiting period after a liquidation bankruptcy discharge is 24 months, although you must explain the reasons for liquidation and the plans you have to rebuild your credit score. With Chapter 13, you can borrow a VA mortgage after at least twelve months of discharge.

Available Mortgages After Bankruptcy

Once you file for insolvency, you qualify for almost any mortgage. No statutes restrict your eligibility for loans after bankruptcy. You can apply for any loan after you meet the waiting time provided for your bankruptcy type. Nevertheless, some mortgages are quicker to be eligible for than others.

The best mortgage for a person with a bankruptcy history is an FHA mortgage, which has a shorter waiting period than other mortgages. After a Chapter 13 discharge, you do not have to wait to apply for the mortgage. FHA mortgages have fewer credit restrictions, which makes them the best mortgages. Your bankruptcy record will stay visible to the public for 10 years (Chapter 7) and 7 years (Chapter 13) after court dismissal, so you need to go for a mortgage with fewer restrictions to reduce the waiting period.

Mortgage Application After Bankruptcy

The steps you will follow when applying for a mortgage are:

     1. Increase Your Credit Rating

A bankruptcy criminal history lowers your credit rating dramatically. However, despite the low score, you could be eligible for a mortgage if you satisfy the lender's most minor credit rating conditions. If your rating is 580 or lower, you will wait longer to qualify for the loan.

Nevertheless, you can take particular steps to increase the score. First, repair or re-establish your credit by obtaining a secured credit card. Your deposit on the card becomes your credit line. You can use these deposits to repay your debt.

Alternatively, you can lower your debt after bankruptcy discharge by making further payments toward repaying creditors. This is a sign of goodwill and commitment to enhance your credit rating and financial position. With reduced credit, it will be easier to obtain debt.

Lastly, prompt payment of bills will increase your credit score. You can even use auto-pay to ensure all payments happen on schedule.

     2. Obtain an Explanatory Document

Before granting your mortgage application request, your creditor reviews your finances. They are taking a risk by lending you money after bankruptcy. Therefore, they want to be sure you will honor the monthly payments.

A letter explaining the reasons for declaring insolvency and providing additional information about your financial position can enhance your chances of mortgage approval. Mention how you ended up in insolvency and the steps you have taken to restructure debt. Also, your plans to prevent bankruptcy in the future, like establishing an emergency account, must be mentioned in the letter.

The explanatory letter is not a requirement for a mortgage application, but it can boost your chances of acquiring a loan. Let the letter accompany your pre-approval application.

     3. Obtaining Pre-Approval

Once the waiting time for the application ends and you have improved your financial position, you can submit your loan pre-approval application. A letter will then be sent by the creditor notifying you of the amount you can borrow as a mortgage. The letter lets you know the properties you can purchase based on the mortgage and informs realtors that you will obtain the money necessary for the purchase.

Creditors will require bank statements, the latest pay stubs, and W-2s in the preapproval application. There is a difference between prequalification and pre-approval, so you should talk to your attorney to explain the difference and guide you through the application.

     4. Respond to the Queries from the Creditor

Once you submit the preapproval application, the rest is up to the creditor. The lender will evaluate your income, debts, assets, and credit to determine your eligibility. If they are satisfied with your candidature for the mortgage, they will issue a pre-approval note. After receiving the letter, you can search for a house.

Because of the bankruptcy record, the lender will have many questions about your credit score. Be transparent when answering these questions and respond promptly to enhance your chances of approval.

Find a Competent Bankruptcy Attorney Near Me

If you have a bankruptcy record and want help purchasing a house, you should talk to an experienced bankruptcy legal representative. At San Diego Bankruptcy Attorney, we understand the consequences of bankruptcy and how it can be challenging to rebuild even after court discharge. Therefore, we are ready to help you regain your financial position and rebuild your home after insolvency. Contact us at 619-488-6168 to evaluate your case.