As a bankruptcy attorney, we hear a lot of questions about mortgages. Understandably, people want to know if they will be able to buy a house, refinance, or keep their current home if they file for bankruptcy. While bankruptcy does provide much-needed debt relief, it isn’t for everyone, so it is important to consider what your total financial goals are before pulling the trigger.
Here is what you need to know –
Your credit will be impacted. When you file for bankruptcy, it will negatively impact your credit score. However, you must consider what the alternative is. For example, if you are maxed out on all of your credit cards, have a lot of loans and are making payments late – your credit score is probably already taken a significant dive. It is common for people that had scores in the 700s to drop into the 500s simply by being overextended and making late payments. If you are in this situation or will be shortly, you’re going to have a lower credit score regardless of whether or not you file for bankruptcy.
You’ll have to rebuild. As a bankruptcy attorney, we regularly provide clients with suggestions for how to rebuild their credit. This is an important part of the process. Once you have filed, you will need to get new credit accounts that you can use and pay on time in order to see improvement in your credit scores. Most people have to start with a prepaid credit card where you put money on it, use it, and repay it. While this is borrowing money from yourself, it will start to give you positive credit history again. Most lenders require three trade lines (credit accounts) showing a good history in order to approve you for a mortgage loan. Keep this in mind if you want to buy a house in the future so that you can set yourself up for success.
Time heals all wounds (and credit history). If you wait long enough, the negative effects of filing for bankruptcy will dissipate as long as you have new and positive credit history. You can ask for the bankruptcy record to be removed from your credit history after seven years though many FHA and VA lenders will give you a mortgage loan two to four years after filing a Chapter 7. Traditional lenders may require a waiting period of four years or more.
Current mortgages. If you have a home loan now, you can typically stay in your house as long as you continue to make your mortgage payments. Otherwise, you can discharge this debt but will have to move out. If you want to stay in your home and refinance your loan, we can help to negotiate with the lender as part of the bankruptcy process, and you may be able to have your payments reduced, at least temporarily. This may make it possible to make staying in your home affordable.
To learn more about your mortgage options, call and speak with a bankruptcy attorney.
