Sometimes, paying rent to a landlord feels like throwing money down the drain each month. But improving credit to a score that yields favorable interest rates and saving up the funds for a down payment simply isn’t possible for some in the current economic market. Clearing debts with bankruptcy may need to be part of the home-buying equation for them. Bankruptcy can have an immediate impact on a debtor’s credit score, and imposes waiting periods to buy or refinance a home after discharge. Devising a legal strategy that helps a debtor get the most out of bankruptcy with as few obstacles to home ownership as possible can be complicated. Most people are already busy enough as it is without having to learn about the ins and outs of debt relief through bankruptcy. You can retain a skilled bankruptcy attorney to take the burden off of you before, during, and after your case. Don’t assume you have to represent yourself because of unrealistic legal costs. Our Arizona bankruptcy team removes barriers to filing by offering free case evaluations and flexible payment plan options. Get started today with your free consultation at 602-649-4949 to learn more.
Buying a Home After Filing For Chapter 13 Bankruptcy
Chapter 13 bankruptcy reorganizes debt into a payment plan lasting either three or five years. The payment plan lasts three years if the debtor could have qualified for chapter 7 bankruptcy for falling below a certain household income level. For debtors exceeding that threshold, payment plans last five years. All of the debtor’s disposable income is paid into the payment plan during that time. Because of how much debt is repaid in chapter 13 bankruptcy, it is typically viewed more favorably by future lenders. It also remains on the debtor’s credit report for a shorter time period. A chapter 13 bankruptcy debtor will be eligible to purchase a home much sooner than the 7 years the bankruptcy will remain on their credit. The waiting periods to buy a home after chapter 13 bankruptcy are as follows:
- VA loan: 1 year
- FHA loan: 1 year
- USDA loan: 1 year
- Conventional loan: 2 years
Reducing The Waiting Period By Demonstrating Extenuating Circumstances
A bankruptcy debtor can reduce their applicable waiting period to buy a home after discharge by demonstrating that the bankruptcy filing was caused by extenuating circumstances. There are various definitions for this term, and different lenders and agencies can select their own when reviewing a post-bankruptcy debtor’s application for a line of credit. Some require that extenuating circumstances be outside of the debtor’s control- for example, getting laid off from a job as opposed to quitting. Others may consider long-term unemployment or family matters, such as divorce or child support, as extenuating circumstances that warrant a reduction in the post-bankruptcy waiting period. The FHA uses a mathematical approach- an extenuating circumstance is one that reduces the debtor’s income by 20% or more for 6 months or longer. If you know which type of home loan you wish to use to purchase a home in the future, you should familiarize yourself with their practices of extending lines of credit to debtors after bankruptcy.
Buying a Home After Filing For Chapter 7 Bankruptcy
Chapter 7 bankruptcy liquidates debts instead of paying them off in an orderly fashion, like in chapter 13 bankruptcy. Therefore, debtors who file for chapter 7 bankruptcy are seen as more of a risk and are subject to longer waiting periods after discharge. A chapter 7 bankruptcy also remains on the debtor’s credit report longer- ten years- than chapter 13 bankruptcy debtors. The waiting periods begin running when the debtor’s case is either discharged or dismissed. A case that proceeds all the way through discharge will typically last about four to six months. The waiting periods to qualify for a home loan after chapter 7 bankruptcy are as follows:
How To Rebuild Credit After Bankruptcy
The impact bankruptcy has on a person’s credit score can depend on factors like their credit score before filing and the chapter of bankruptcy used. Whether you file for chapter 7 or chapter 13 bankruptcy, you can take action to improve your credit after your debts have been cleared. This will improve your odds of approval if you wish to obtain a home mortgage after bankruptcy. Like before bankruptcy, much of improving consumer credit is making timely payments on lines of credit, keeping the revolving balance low. But debtors lose all of their credit cards upon filing for bankruptcy, and must apply for new ones when their cases are closed. And if they do retain a line of credit in bankruptcy- such as an auto loan- the lender may no longer be required to continue positive credit reporting after bankruptcy, leaving only the possibility of negative credit marks if the debtor makes any late payments.
A debtor may be reluctant to open up new credit cards after bankruptcy, despite their potential to help build credit history. After all, credit cards could be a major contributing factor to the debtor’s bankruptcy filing. However, there are options that allow a post-bankruptcy debtor to enjoy credit-building benefits without the risks of standard credit cards and personal loans. One is by opening up a secured credit card. This is a pre-paid credit card typically offered by the debtor’s banking institution. It can slowly boost credit, and the debtor can’t work up an unmanageable balance or incur interest and late fees. Another is by taking out a credit builder loan. This essentially allows the debtor to make payments into a savings account, while improving their credit, if the account isn’t touched before a certain date.
While credit cards bear certain risks, they also can build credit and come with benefits like cash back and airline miles. When used conservatively, they can be a wise choice for a post-bankruptcy debtor looking to improve their credit score. The debtor can choose to participate in credit reporting for other monthly bills, like rent, streaming services, and more. Utilizing as many strategies as possible will give the debtor the best results. This can ease the home-buying process in the future. If you’re looking for more information about improving credit after bankruptcy so purchasing a home is more affordable, call 602-649-4949 for your free consultation with our firm.
Reliable Representation For Bankruptcy in Phoenix
Bankruptcy provides powerful debt relief, but it can place restrictions on the debtor’s ability to purchase or refinance a home in the future. The best way to mitigate these drawbacks is by planning your bankruptcy filing (and future home purchase) with a skilled legal professional in Arizona. If you’re looking to declare bankruptcy in the Phoenix area, we hope you start your search for a trustworthy law office with our firm. We put our experience to work making the process of filing for bankruptcy as easy as possible for our clients. Schedule your free case evaluation today at 602-649-4949 to learn more.
