Bankruptcy can give you a fresh financial start by allowing you to restructure or erase your debts under a court-supervised process. However, your bankruptcy case doesn’t go away once your court process is complete. Bankruptcy stays on your credit report and can hurt your ability to obtain credit in the future, including home loans.
If you choose to file for bankruptcy under Chapter 7 of the Bankruptcy Code, the court-appointed trustee will sell assets that don’t qualify for bankruptcy exemptions. Many Chapter 7 debtors don’t have any nonexempt assets; thus, there is no property to actually sell. However, you must meet certain income qualifications before you can file under Chapter 7. If you do not qualify for Chapter 7, you can file under Chapter 13. Chapter 13 debtors create a repayment plan under which they repay a portion of their debts over three to five years; remaining eligible debts are wiped out if the debtor successfully completes his plan. It’s possible to purchase a home during this repayment period, though you must get permission from your court-appointed bankruptcy trustee before getting a mortgage.
Typically, bankruptcy cases negatively impact the debtor’s credit rating since creditors view bankruptcy as an indication the debtor may not repay credit extended to him. If you file for bankruptcy, you may find it more difficult to obtain car loans, home loans or other types of credit. Chapter 7 bankruptcy stays on your credit report for seven years and Chapter 13 bankruptcy remains on your report for 10 years. You can improve your credit score by paying all your bills on time, reducing your debt and clearing up any errors on your credit report.
Mortgage lenders may consider other factors in addition to your credit rating when deciding whether or not you qualify for a mortgage after bankruptcy. For example, lenders consider your debt-to-income ratio, which compares your income to the amount of monthly debt payments you have. Depending on the terms of your loan program, your lender could require you to provide more money in a down payment before giving you a loan.
Borrowers with higher credit scores generally have loans with lower interest rates since the lender feels it is taking less risk when a borrower’s credit score is high. While bankruptcy doesn’t automatically impact the interest rates you are offered, a bankruptcy-related decrease in your credit score may increase the interest rates your lender will offer. Over the life of the loan, an increased interest rate can cost you a significant amount of money.