Bankruptcy offers many Americans a chance at a clean slate and a fresh financial start. Filing for bankruptcy provides those in debt with an automatic stay on collection efforts, including pending lawsuits, collection calls and frightening letters. Bankruptcy also offers hope for restructuring overwhelming debt for some in Chapter 13 or in the discharge of unsecured debts for others in Chapter 7.
Regardless of which kind of bankruptcy would be a better choice in your situation, you probably have questions and worries about the process. There are many common misconceptions about bankruptcy that can leave people nervous about seeking this type of relief. One of these myths is the idea that you will never be able to buy a home after filing for bankruptcy.
Bankruptcy may make future home ownership possible
If you’re swimming in medical or credit card debt, you may not have the ability to save anything for a down payment for a home. Modern mortgages often work with buyers who have 3 to 10 percent for a down payment instead of the traditional 20 percent. Yet, that still requires substantial savings.
If you can barely make your minimum monthly payments on debts, you won’t be able to accumulate funds for a down payment.
Bankruptcy relief can help decrease your financial load and free up some of your income to save for a home. It can also help you improve your overall credit situation, potentially making you a better candidate for a mortgage in the future.
Your debts could drag down your credit score
Most people understand that bankruptcy will go on your credit report. However, any garnishments, judgments or late payments to creditors also show up. Potential lenders will look at the history of your payments, as well as the overall debt burden you have, when qualifying you for a mortgage. In other words, huge debts and missed payments could already make it hard for you to qualify for a mortgage.
After your bankruptcy, you can start rebuilding credit in a responsible manner. You can expect your bankruptcy court discharge to remain on your credit report for seven years if you file Chapter 13 and ten years if you file Chapter 7. Overall, however, that one negative mark may have less bearing on your credit score than a handful of overdue, maxed-out credit cards could.
Typically, you want to wait at least two to three years before applying for a mortgage after bankruptcy. If you start rebuilding credit with a secured credit card right away after bankruptcy, you’ll have a solid record of on-time monthly payments. While you may qualify sooner, remember that your credit score impacts the rate you get. A higher credit score and better rate can save you thousands over the life of your mortgage.
