Mortgage Application: The Impact of a Bankruptcy on Your Ability to Borrow
Tuesday, May 20, 2014 -
In the past, filing for bankruptcy disabled a once borrower from home ownership through financing; but the rules of the game are changing, and today, even those who recently came out of a bankruptcy episode may be approved when applying for a home loan. Specially after the subprime lending crisis, government institutions were the first ones to help borrowers who experienced financial difficulties get back into financing their home purchases.(1) Albeit more expensive, if you have an instance of bankruptcy in your credit history, you can get financing.
Financing the purchase of your home is still a possibility, and I am not talking about subprime lenders, for individuals who had a good credit history before the bankruptcy episode, and who followed the plan appointed by court. Today, there are programs that allow a recent bankrupt borrower get financing two years after the event. You may be required to attend housing counseling, but if you can show full recovery, you can qualify.
Bankruptcy is a legal process that allows you to eliminate or repay your debts. If you file bankruptcy, the court takes control over your assets, and stops all collection actions. The court also decides which debts will be forgiven, and which debts will require payment. There are various types of bankruptcy filings, some allow the dismissal of debts, and other allow the restructuring of debts and a payment plan which the debtor can afford.
Types of Bankruptcy Filings:
Chapter 7 Bankruptcy:
- this is the most common type of bankruptcy, also known as straight bankruptcy. Under this type of filing, many of your assets are liquidated, and the proceeds are used to pay creditors. This type of bankruptcy will remain in your credit history for 10 years.
- Most likely you would not be able to be discharged from child support and alimony responsibilities, income taxes from previous 3 years, property taxes, student loans, and/or fines and restitution responsibilities imposed by a court order.
- You can find in depth details obout this type of bankruptcy here: http://www.uscourts.gov/FederalCourts/Bankruptcy/BankruptcyBasics/Chapter7.aspx
Chapter 13 Bankruptcy:
- This type of bankruptcy allows individuals with regular income to establish a payment plan which may span from 3 to 5 years. For debtors whose income is below the states average level, the court is likely to approve a 3 year plan, while those with income levels above the states median level, the court is likely to approve a 5 year plan.
- The greatest advantage of this type of bankruptcy, say over the chapter 7 type, is that debtors may avoid foreclosure and keep their primary home.
- In general, this type of bankruptcy allows debtors to restructure their debts over the chapter 13 plan approved by the court.
- You can find thorough information about this type of filing here: http://www.uscourts.gov/FederalCourts/Bankruptcy/BankruptcyBasics/Chapter13.aspx
Chapter 11 Bankruptcy:
- Although mostly used by businesses, corporations, sole proprietorships, etc. this type of bankruptcy can be filed by an individual. This is the most expensive type, and it is referred to as a reorganization bankruptcy. Under this chapter, whether willfully or not, the individual may be granted a restructured plan to pay debts out of future earnings.
- One of the greatest advantages of filing under this chapter, is that the individual is likely to remain in control of his business and/or assets. however, the individual takes the role of a fiduciary, and he is required to perform many administrative duties that require him to file a monthly report with appointed trustee who ensures the debt complies with the plan set forth during the filing.
- You can find thorough information about this type of filing here: http://www.uscourts.gov/FederalCourts/Bankruptcy/BankruptcyBasics/Chapter11.aspx
- This is the cheapest to file type of bankruptcy, and it is only available to family farmers or family fishermen who have a regular annual income. This chapter allows debtors to propose and carry out a plan to pay their debts. Plans under this chapter may span from 3 to 5 years.
- Under this chapter, it is much easier for farmers and fishermen to restructure their debts, as opposed to filing under chapter 11 or chapter 13.
- Although only available to those with a regular annual income, the law makes allowances for cases in which the debtor has seasonal income.
- You can find thorough information about this type of filing here: http://www.uscourts.gov/FederalCourts/Bankruptcy/BankruptcyBasics/Chapter12.aspx
The makeup of our economy is changing, and it is possible that even good borrowers may find themselves in trouble due to unforeseen loss of employment, a dramatic downturn of the economy, a disease, etc. However, how you respond to financial difficulties will greatly influence how fast or battered you come out. Filing bankruptcy is not an ideal solution when you are unable to pay your debts; but when that is the only way to get through, a proactive approach, and fulfilling the plan you agree to in court may help you recover from the bad episode, and leave it behind. Our society is really far better than medieval times when delinquent borrowers were taken to debt houses, and left there to rot. If you are a struggling borrower, or if you experienced a financial hardship that scarred your credit history, have an honest conversation with your mortgage expert, and you may be able to pursue the American Dream just like everybody else.
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