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| Bankruptcy – The Effects on a Buyer to Purchase a Home |
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The two most common types of bankruptcies are Chapter 7 and Chapter 13. They are distinguished by “liquidation” or “reorganization.” Under Chapter 7 a trustee is automatically appointed and the debtor is then required to turn over all non-exempt property. Exempt property is described as the items or belongings the debtor gets to keep. The trustee will liquidate all non-exempt property and pay unsecured creditors a pro rata share of their claims from the proceeds. All administrative and priority claims like Trustee’s fees, IRS debts, child support, etc. must be paid before any other payments are made to creditors. The “fresh start” philosophy in United States bankruptcy law allows the debtor to keep all exempt property. A debtor will usually receive a release from personal debt liability within a short time of filing the petition. However, if the debtor receives the release they may not receive another under the same Chapter for six years.
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Chapter 13 bankruptcy may only be claimed by individuals with regular income. Under this Chapter the debtor is to pay all disposable income, minus regular living expenses, but is allowed to keep all property, exempt or otherwise. The trustee then pays the creditors according to a plan the debtor contributes, less administrative claims. The plan generally last for three to five years. The debtor, after successfully completing the plan, will receive a discharge. There are no time limits for receiving another discharge under Chapter 13 bankruptcy.
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The automatic stay is one of the common aspects to both types of bankruptcies. The stay arises immediately upon the filing of the petition and acts as a temporary restraining order, prohibiting creditors from pursuing collection debts. Even if the debtor is in the middle of foreclosure proceedings, the stay would prevent the foreclosure from going forward. The court would then decide if the creditor may proceed in collecting the debt. Generally, if the debtor is unable to make payments after the filing the court would then allow the creditor relief from the stay.
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Bankruptcy will affect the buyer’s credit but will it be detrimental to their ability to purchase a home? Not necessarily. Most debtors would not qualify for credit because of the outstanding debts, so a debtor’s credit risk is likely to be more favorable after the filing than before, especially in a Chapter 7, since the debtor must wait six years before being able to get another discharge.
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A buyer can begin repairing their credit immediately after filing for bankruptcy. The rates are likely be higher than if bankruptcy was not filed but due to a competitive lending market there are some lenders that target the recently bankrupt as clients. The important thing to remember is that this new credit must be treated with respect because although a bankruptcy will remain on a clients credit report for ten years the good credit will also. Over time the bad credit becomes less important and the newly established good credit takes precedence. The new credit is what will enable the buyer to purchase a home.
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Many studies have shown that most buyers are eligible to purchase a home no later than two years after filing. And in many cases, buyers are able to purchase after just one year. They also typically qualify for the same rates as those with equal financial circumstances that did not file. The down payment and the debtor’s current income stability will weigh more heavily than a past bankruptcy.
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Reestablishing good credit and taking wise financial action should provide peace of mind to those potential home buyers that are concerned about not being able to purchase a home. A past bankruptcy will not ruin chances of qualifying for a mortgage loan.
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