Currently, bankruptcy offers very limited protection to a homeowner who is upside down with his or her payments. The borrower can file a Chapter 7 which, depending on the state bankruptcy law, will most likely require him or her to surrender the property to the bankruptcy court, or file a Chapter 13 debt repayment plan to spread out prior delinquent payments over a number of months or years in the future. However, no bankruptcy proceeding can modify the terms of an existing home loan on a principal residence. Legislation is being proposed to Congress that would allow bankruptcy judges to modify the terms of an existing mortgage loan. I would not hold my breath. It could take years to make further substantial changes to the bankruptcy laws.
The most common bankruptcies are Chapter 7 and Chapter 13. Here are the differences:
- Chapter 7 – In this type of bankruptcy, you are asking for the court to discharge all of your debts. It is sometimes referred to as “straight bankruptcy.” A Chapter 7 trustee is appointed to take over your property. Any property of value will be sold or turned into money to pay your creditors. Depending on the law of the State in which you file, you may be able to keep some of your personal and real property. If you have the ability to repay your debts, after taking into account reasonable and necessary living expenses, you may not qualify for relief under Chapter 7.
- Chapter 13 – In this type of bankruptcy you have 3-5 years to pay off your debt and you will be allowed to keep your most valuable property such as your home and your car, but you must earn wages or have some other source of regular income to be a debtor under this chapter. It is frequently referred to as the “wage earner” chapter. The Court must approve your repayment plan and budget. A Chapter 13 trustee is appointed, and will collect the payments from you. The trustee, in turn, will pay your creditors and monitor your compliance with the terms of your repayment plan. After completion of all payments under your plan, you will receive your discharge.
How Does a Bankruptcy Affect Credit?
A bankruptcy is reported on your credit report as a public record, and there is no doubt that your scores will drop anywhere from 100-300 points when it first hits, depending on how many points you still have to lose in your payment history factor. Keep in mind, by the time you have filed bankruptcy your scores have already taken a serious hit from the delinquent accounts. That’s the bad news. The good news is that you can start rebuilding immediately.
How Long Will A Bankruptcy Remain On Your Credit Report?
Section 605 of the Fair Credit reporting Act states that bankruptcies can remain on a credit report for up to 10 years. Here’s the language:
605. Requirements relating to information contained in consumer reports [15 U.S.C. §1681c]
(1) Cases under title 11 [United States Code] or under the Bankruptcy Act that, from the date of entry of the order for relief or the date of adjudication, as the case may be, antedate the report by more than 10 years.
That legal language states that no bankruptcy can be reported for longer than 10 years; however, all three credit bureaus report as follows: Chapter 7 bankruptcies for 10 years from the date of the filing, and Chapter 13 bankruptcies for 7 years, also from the date of filing.
That does not mean that you have to wait 7-10 years to seek removal. I’ve said it before-to my knowledge there is no language in the law that states items MUST be reported for a certain period of time, only that they CAN be.
How Long Before You Can Buy Another Home After Bankruptcy?
The current guidelines from Fannie Mae & Freddie Mac state the waiting period for a Chapter 7 Bankruptcy is 4 years from either the dismissal or discharge date. The exception for extenuating circumstances is 2 years.
The current guidelines state that the waiting period for a Chapter 13 Bankruptcy is 2 years from either the dismissal or discharge date. There are no exceptions for extenuating circumstances.
In the case of multiple bankruptcies, the current guidelines state that the waiting period is 5 years from the most recent discharge or dismissal date. The exception for extenuating circumstances is 3 years from the most recent discharge or dismissal date.
The exception for extenuating circumstances in the case of multiple bankruptcies is a 3-year waiting period from the most recent discharge or dismissal date.
WORD OF CAUTION: If you are facing a foreclosure, short sale or bankruptcy due to circumstances of losing a job, a medical crisis, the sub prime mortgage crisis fallout, I suggest that you fully document your experience -starting now. It’s not recommended to wait until later, because, if you decide to apply for a loan in two years based on an extenuating circumstance claim, the details and emotional energy of what you are going through will be more difficult to document and prove down the road.
Recovering Your Credit After Bankruptcy
- Click here to read my recent article on Bankruptcy.
- My Free Special Report, Save Your Credit – Save Your Life is a great place to start! Click here to learn more.
- My Book, The Big Score – Getting It & Keeping It will give you the knowledge and the tools you need to Recover and Rebuild from any credit crisis. Even if you have great credit now, this book will help insure that it stays that way. Click here to learn more.
- Hire a Professional to help. If your credit challenges are to much to handle on your own, consider hiring Credit Resource Corp. to help you reach your credit score goals. Click here to read about their services now.
Recovering from bankrupty is not an easy task, but the good news is that you can start recovering immediately with access to the right advice, knowledge and tools. For much more information on recovering from bankruptcy, I highly recommend that you read my book. check out my book, The Big Score. And even though, my book is only the first step toward guiding you through your credit issues, it will be a very good start.
Next time, in the final installment of this series, we’ll examine what the best option might be out of the ones we’ve explored over the last few weeks. I’ll share some good news and leave you with a few final thoughts. Have a great week and I’ll talk to you soon!