Filing for Chapter 7 or Chapter 13 bankruptcy can stop your home buying plans dead in their tracks, but filing for bankruptcy is by no means a financial death sentence.
In our experience, individuals who file bankruptcy do not file because they are reckless spenders. Rather, they file because they lost their job, their mortgage was deeply underwater, or they had another tragedy, such as an illness or death in the family.
These individuals are usually the ones who benefit the most from owning a home, and from owning an investment that can increase in value and help them when it's tax time.
If you're deep in debt, you may be worried that filing for bankruptcy may ruin your hopes of buying a home in the future.
We want to point out that if you're contemplating filing for bankruptcy, there is a good chance that your debt to income ratio is too high, and your credit has already taken a hit.
How many years would it take you to pay that debt down?
While a bankruptcy does impact your credit – that does not mean that you can't bounce back. In fact, you may be able to buy a house following a bankruptcy discharge much faster than you would have thought.
Rebuilding Your Credit
Your bankruptcy must be discharged by the bankruptcy court. If your bankruptcy hasn't been discharged or if you're still paying off your Chapter 13 plan, no mortgage lender will accept an application.
Once your bankruptcy is discharged, you want to order copies of your credit report from the three bureaus (Equifax, Experian and TransUnion) and scrutinize each one of them. If there are debts that were supposed to be included in the bankruptcy that are not showing, correct them along with any other mistakes.
The fastest way to rebuild your credit and prove to lenders that you're a worthy borrower is to take out credit cards and installment loans, for example, an auto loan.
Tips for rebuilding your credit:
- Get credit cards, but shop out their rates and annual fees online,
- Pay all of your bills on-time,
- Stay at the same job for a while, this shows financial stability,
- Set aside money for unexpected expenses, and
- Pay off your credit cards each month in full, or only carry a small balance (e.g. 10% of the credit line).
You may have sworn off credit cards forever, but when it comes to rebuilding your credit and buying a house, they are your best friend.
If you want to buy a house, you should wait at least two years after the bankruptcy is discharged before applying for a loan. While you may be able to get a mortgage sooner than that, the interest rates may be a lot less attractive than if you waited the two years.
To learn more about the bankruptcy process, contact a Schenectady bankruptcy lawyer from The De Lorenzo Law Firm. All of our initial consultations are free.