Most of us have been conditioned by movies and television to associate personal bankruptcy with a handful of frightening images—movers hauling away furniture, bank officers laughing at an application for a home loan. But not only are these images inaccurate; they also obscure a very important truth. The truth is that for someone considering filing for personal bankruptcy, the frightening part is already upon them. And the frank truth is that for someone who’s falling behind on credit card payments or medical bills, qualifying for a home loan is unlikely without making some changes.
But there’s good news after bad, and the good news is that, for most people struggling with debt, filing for bankruptcy is the end of the frightening part. Depending on whether a person files under Chapter 7 or Chapter 13, their debts will either be discharged or reduced to a short-term payment plan set by their budget. Most creditors will be required to cease and desist attempts to collect, and the former debtor will finally be able to set about building their life without all the chaos and threatening letters. Bankruptcy is, after all, a relief service guaranteed to citizens by federal law, not a punishment.
So how long does it take to buy a house after filing? The short answer is probably around two years. The Federal Housing Administration won’t guarantee a loan until two years after discharge, and most major banks require a minimum of two years after discharge plus proof of extenuating circumstances. A few examples of extenuating circumstances are loss of employment, divorce, and poor health. In fact, most people who file for bankruptcy have suffered these sorts of hardships. These sorts of hardships are a large part of why bankruptcy protections exist. Different banks have their own policies, but for most, applying for a home loan two years after bankruptcy discharge is generally the most practical option.
But before applying for a home loan, a wise consumer should plan. Many creditors, (such as credit card companies) will be happy to extend credit to a former debtor freshly out of bankruptcy. It’s important to take advantage of the reputable offers, as lines of credit, smartly utilized, will help the former debtor to quickly establish an impressive credit score. In fact, a good attorney should advise their client on how best to go about this, so that their client can confidently set the date that they will apply for a home loan with not just a clean slate but also excellent credit.
by Reagan Healey