Bankruptcy

Although this should always an alternative of last resort, a bankruptcy(BK) is a viable alternative when you are struggling with your mortgage payments as well as your other obligations. If you are facing foreclosure and you have exhausted all alternatives including those described in our blog a BK(chapter 13) can stop foreclosure in it's tracks. A BK filing delivers a devastating blow to your credit and FICO score, but it doesn’t mean you have to wait 10 years before you can qualify for a mortgage.

There are two types of consumer BKs:

• Chapter 7 - a chapter 7 BK liquidates all your debts so you can start with a clean slate. It is less expensive to file than a chapter 13. However, since there are some income and expense requirements, not everyone qualifies for a chapter 7. If you are trying to save your house from foreclosure then you should consider a chapter 13 instead.
• Chapter 13 – a chapter 13 BK reorganizes all your debts into one single monthly payment that will be lower than all of your payments combined. You make this payment to the court Trustee, and the Trustee in turn distributes that payment into your creditors. Your creditors could be your mortgage company, auto loans, student loans, real estate taxes, unsecured debts(credit cards), etc. As long as you make your payment on-time your house is protected.

With either choice, you will have to pay attorney and court fees. These fees will have to be paid upfront on a chapter 7, and are partially included in the monthly payment on a chapter 13. Consult your BK attorney for legal advice and for a breakdown of fees.

Following are several things you should know prior to filing for BK:

• Filing for bankruptcy, especially in this economy, does not carry the negative connotations that it once did.
• Although it will remain in your credit report for up to 10 years, it does not mean that you can’t refinance or buy much sooner. On FHA loans, chapter 13 bankruptcies are allowed to refinance if it has been at least a year since the petition was filed. A good BK payment history will be necessary. Chapter 7 must have been discharged for at least 2 years or possibly 1 year with a hardship letter.
• If you filed chapter 13 to protect the house from foreclosure, chances are that the foreclosure notice is already in your credit report. This means that you will have to wait 3 years since the foreclosure attempt, for any lender to consider you for a mortgage.
• If you quit making your chapter 13 monthly payment, your case will be dismissed. Then you will lose your house and the other creditors will come after you, not to mention that you already went through all the legal expenses. Lenders don’t like to see dismissals on credit reports.
• You will have to attend a debt management counseling class to train you on ways to manage your finances properly.

While credit card companies may care about what happened before you filed for bankruptcy, many mortgage lenders are more interested in your recovery — what you’ve done since your filing. It won’t happen over night, but here are some tips and things to keep in mind when you inquire about a mortgage with a tarnished credit past:

Give explanations. No mortgage lender is going to ignore the fact that you’ve filed bankruptcy and he or she will likely want to know the cause of the filing. Your lender will be particularly interested in whether the same situation could happen again. Your chances of being qualified are much better if your bankruptcy was caused by a single event such as a loss of employment or a death in the family, than if it was the result of “just spending too much.”

If the bankruptcy resulted from a single event, it is important to show your lender paperwork describing the incident, such as the layoff notice or death certificate. You may also want to bring in court documents to indicate when the bankruptcy was filed.

Demonstrate good money habits now. Many people who file bankruptcy swear off credit altogether, however, it is important to re-establish your credit rating. Get a secured credit card or take on some sort of loan — furniture, a car or a major appliance — to demonstrate that you are able to make timely payments. Make sure you are making other payments (utility bills, cell phone, etc.) on time as well. You won't turn things around in a year but your credit score will improve over time.

Dispute any credit report errors. There’s no need to add to your troubled credit history with errors on your credit report. Get a copy of your credit report from each of the three major credit reporting agencies: Equifax, http://www.equifax.com; Experian, http://www.experian.com; and TransUnion, http://www.tuc.com. If you encounter any errors, inform the CRA in writing what information you believe to be inaccurate and request deletion or correction.

Save your money. Lenders may be more willing to loan you money if you’ve saved up a considerable amount of money for a down payment.

Live within your means. Even subprime lenders won’t risk loaning you money for an opulent oceanfront mansion. Think small when the time comes to look for a home. Smaller homes often mean smaller mortgages.