How a bankruptcy filing can save your home
By the time the foreclosure notice arrives, most struggling home owners figure they are out of options. But there is one more step, often overlooked but sometimes effective: bankruptcy.
It’s not a move to be taken lightly. But the impact — especially on your chances of getting a loan — may not be as dire as many consumers assume. In fact, home owners facing foreclosure may be able to improve their credit with a bankruptcy filing.
Bankruptcy is not the ideal first choice for anyone struggling to pay the bills. The first step is to approach lenders or others to whom you owe money and see if you can work out a more inexpensive payment plan. If you are unable to do so on your own, an accredited credit counselor may be able to intervene with lenders on your behalf.
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Homeowners facing foreclosure also have several options to minimize the long-term impact on their credit — even if they ultimately lose the house. If the lender concurs to a short sale, for example, you may be able to sell your home for less then you owe. In a so-called “deed in lieu” of foreclosure, you give the lender the deed to your home and avoid a formal foreclosure proceeding. By doing so, you will avoid the devastating damage to your credit brought by a foreclosure.
If none of those steps work, bankruptcy may provide relief for the worst case of a foreclosure judgment, and inflict less damage to your credit. Bankruptcy automatically stops the foreclosure process, giving you and the court time to try to get you back on track with your mortgage payments. That help can make a huge difference for home owners struggling to deal with a lending industry overwhelmed by the mortgage mess.
Even if you fail to save your home, the consequences of a bankruptcy filing may be less severe than a foreclosure.
“In the eyes of lenders, you are making an attempt to pay back what is owed and keeping up with your payments,” stated Raquel Price, a bankruptcy attorney in State College, Pa. “With a foreclosure, you simply just walk away after not paying for a period of time.”
Bankruptcy laws, after all, were established to provide an orderly process for people in financial trouble to reorganize their debts, begin fresh and rebuild their lives.
“Most people who file bankruptcy do not file because they are poor managers of credit,” stated John Ulzheimer, president of consumer education for SmartCredit.com. “Most people file because of some other incident that is out of their control – like a divorce, or loss of job, or the death of an earner in the family or some major medical event that zaps out their savings.”
With home prices falling, unemployment near 9 percent and wages stagnant, the volume of fillings continues to rise. Last year, some 1.5 million consumer filings were reported — up 9 percent following double digit gains in each of the previous three years, according to the American Bankruptcy Institute.
As government mortgage relief programs have fallen well short of their goals and lenders struggle to find solutions, bankruptcy has become a potent weapon for those hoping to save their home from foreclosure.
Last year, foreclosure filings were reported on a record 2.9 million homes in the U.S., up almost 2 percent from 2009 and 23 percent from 2008, according to RealtyTrac. More than one in five home owners with a mortgage owe more than their house is worth, according to the latest figures from CoreLogic. That number of so-called “underwater” mortgages is expected to increase if home prices continue the current trend of edging lower.
A bankruptcy filing will not guarantee you will be able to keep your home. But it stops the process and purchases time while the court reviews your finances and tries to work out a payment plan with lenders.
The mortgage industry supports the current bankruptcy process because it frees many borrowers from some unsecured debts, making it easier for them to support a home loan. But the industry has strenuously fought legislative proposals to change the law to grant judges to modify the terms of a mortgage, including writing down the principal owed — a process known as a “cramdown.”
Contrary to widely-held belief, bankruptcy doesn’t necessarily leave the filer without access to credit.
“I hear that every day from people coming to my office: ‘I thought it takes seven years to rebuild your credit,’” stated Michael Fakhoury, a bankruptcy attorney in Poughkeepsie, N.Y. “It’s not true.”
Credit card offersThough the record of a filing typically remains on your credit report for seven years, many filers begin getting credit card offers within a year or two after the process is completed.
Personal bankruptcy takes two forms. In a so-called Chapter 13 bankruptcy, debts are consolidated and a payment plan is arranged — typically over three to five years. This process grants you to retain assets like a house or automobile and some savings (the rules vary somewhat say to state). Chapter 13 is required for those whose income falls above a “means test.” Once you have filed, you are not granted to file Chapter 13 again for another two years.
A Chapter 7 bankruptcy discharges most forms of debt — usually within six months. To qualify, you have to be current on secured debt payments such as a mortgage.Some debts, including student loans, alimony or child support, cannot be discharged. With Chapter 7, you cannot file again for eight years.
Once the process is complete, credit card companies will likely come calling again within a year or two offering credit, according to Fakoury.
“They know that you do not have any more debt — you just got rid of all your debt,” he said. “So you are a good credit risk.”
Opening new accounts and establishing a solid record of timely payments will help improve your chances of getting more credit, according to Ulzheimer.
“The most predictive item on your credit report is the item that is less than 24 months old,” he said. “So if you can begin populating your credit reports with good things, you are going to accelerate your score improvement much more aggressively than if you just sat there and waited for your score to improve as you put time between yourself and the bankruptcy filing.”
Getting a mortgage after a bankruptcy filing is a tiny tougher, largely because underwriting guidelines have tightened for all borrowers since the housing bust. To qualify for a so-called “conforming” loan backed by government mortgage sponsors Fannie Mae or Freddie Mac, you will need to wait four years after a bankruptcy filing.
But you will be ineligible for seven years after a foreclosure — another reason it might make more sense for some home owners to file for bankruptcy rather than wait for a foreclosure.
For an FHA-backed mortgage, you may be able to qualify within three years of a foreclosure, or two years after completing a bankruptcy. For Chapter 7, the clock on FHA eligibility starts when your discharge is complete, usually within six months of the filing. For a Chapter 13, you will have to wait two years after the payment plan is completed, usually three to five years.
Lenders are also going to want to know why you ended up in bankruptcy court, according to Chad Smith, senior vice president of sales at Lending Tree, a mortgage lender.
“Most underwriters are going to want to know what happened in a detailed letter of explanation,” he said. “If it’s a life event, that is going to be reflected differently than if it’s excessive spending.”
Filling for bankruptcy will not guarantee you will be able to save your home. For some homeowners, the financial hole is just too deep.
“That is a very hard speak to have with them — explaining that no matter what I try to do they will not be able to sustain their residence,” stated Price. “For some clients that is a very tough thing to accept.”
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More source:
How a bankruptcy filing can save your home - Business - Personal ...Chapter 13 Bankruptcy & Foreclosure - Total Bankruptcy
Bankruptcy can save your house from foreclosure - CNN Money
Can Bankruptcy Help Save Your Home From Foreclosure
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