When a debtor lacks the resources to meet all of his (or her) financial commitments, bankruptcy results. A person’s moral character or integrity may not necessarily be compromised by filing for bankruptcy. In some circumstances, especially when there is a negative cash flow (more money is going out than is coming in), filing for bankruptcy might be the best course of action. In other situations, a single occurrence, such as a job loss or medical emergency, might cause a personal economic calamity from which there is no escape and total liquidation is the only option.
Of course, filing for bankruptcy will impact the filer’s credit. Depending on the kind of bankruptcy, the impact lasts between seven and ten years on the consumer’s credit report. It is a bad indicator that prevents a lot of credit transactions. Some lenders will instantly reject a potential borrower whose dossier contains a bankruptcy. This is due to the fact that the presence of a sizable adverse credit event typically indicates a higher chance of future default.
Waiting Periods for Conventional Mortgages
The borrower must wait two years after a Chapter 13 bankruptcy discharge or four years after a Chapter 7 bankruptcy discharge before applying for a conventional mortgage (four years if the Chapter 13 bankruptcy was dismissed without a discharge).
The waiting period following a Chapter 7 bankruptcy may be reduced to two years if the borrower can demonstrate that the bankruptcy was brought on by extenuating circumstances that are not likely to occur again (such as a sudden job loss, a life-threatening illness, or the death of a spouse, for example).
VA and FHA Loans
For potential borrowers who have had a negative credit event, the Federal Housing Authority, which insures loans for millions of homeowners who are ineligible for a conventional mortgage, imposes shorter application waiting periods (three years after a foreclosure or short-sale, and two years after a Chapter 7 bankruptcy). The identical waiting requirements apply to Veteran’s Administration mortgages. After twelve months of timely payments and approval from the bankruptcy court, the FHA and the VA both permit Chapter 13 bankruptcy filers to get a mortgage.
Extenuating Circumstances Program for Returning to Work
Under the Back to Work program, applicants can get an FHA mortgage as soon as a year after receiving a bankruptcy discharge until September 30, 2016. To be eligible, the borrower must demonstrate that the adverse event was mostly brought on by an unanticipated economic catastrophe that was beyond their control, such as a sudden job loss or serious sickness. Events that qualify include:
- Bankruptcy under Chapters 7 or 13
- Sale before foreclosure
- In lieu of foreclosure, a deed
- Modifying a loan
Successful candidates must demonstrate that they have fully recovered from the incapacitating event and that they had a solid credit standing before it occurred. Additionally, the candidate must fulfill the requirements for housing counseling.
Borrowers who undergo several adverse circumstances, such as a short sale or foreclosure in addition to filing for bankruptcy, or who file for bankruptcy more than once within a seven-year period, could fairly anticipate being at a disadvantage. If the mortgage was dismissed as part of the bankruptcy, the lender may choose to apply merely the bankruptcy waiting period in the event of a bankruptcy and foreclosure. If not, the lengthier waiting period is in effect. If you file for bankruptcy more than once, the waiting period is increased to five years (three years if the most recent filing was due to extenuating circumstances).
Rebuilding Following Insolvency
Anyone coming out of bankruptcy who wants to get back access to credit products will have to work on repairing their credit one day at a time. The route is straightforward:
- Pay all bills on time.
- Obtain a secured credit card and switch to a regular card once you are qualified.
- Reduce your balances.
- Request that your timely rent payments be notified to the credit reporting agencies.
- Keep a close eye on your credit.
- Cooperate with the lender to fulfill the requirements
Regardless of FHA or VA requirements, the lender always has the final say on whether to approve a loan. Each lender has its own set of eligibility requirements, including minimum credit scores, and the only method to determine a borrower’s standing is to provide the particulars of their particular situation. Patience can be the only solution when lending requirements are too severe for a bankruptcy survivor to succeed. Retry when a year has passed.