How Does Bankruptcy Affect Homebuying?

By Heather Frances J.D.

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.

Bankruptcy

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.

Credit Rating

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.

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Lender’s Considerations

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.

Interest Rate

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.

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Ways to Prevent the Loss of Your Home in Chapter 7 Bankruptcy

References

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How Does Reaffirmation in Bankruptcy Work?

Bankruptcy is about fresh starts. Filing for Chapter 7 protection allows your bankruptcy trustee to liquidate property you own outright, without liens, and apportion the proceeds among your creditors, although you can use exemptions to protect some property. You have to qualify by meeting certain income requirements, but if you do, bankruptcy legally erases any debts the trustee can't pay through liquidation. The bankruptcy process discharges them and you're not liable for paying them any longer – unless you reaffirm them.

Can a Primary Residence Be Seized if You File for Bankruptcy?

Although filing for bankruptcy can help avoid being overwhelmed by debts, you may not be able to keep all your assets. This depends on the type of bankruptcy you file and whether you take the necessary steps to keep your home. However, your situation may require you to consult with a bankruptcy attorney if it’s too complicated to make these decisions on your own.

Bankruptcy & Investment Property Foreclosure

When housing prices fluctuate, your investment property may lose so much value that you end up owing more on your mortgage than your property is worth. If you cannot make the mortgage payments, your lender may begin the process of foreclosing on the property. Filing for bankruptcy before the foreclosure is completed may allow you to reduce your debt, or tax burden if your property is sold.

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