It is no secret that filing for bankruptcy may offer you some relief from severe financial burdens. Bankruptcy may protect you from being sued by your creditors. It may stop collection phone calls and letters. And, if you qualify for a Chapter 7 bankruptcy you may wipe out some or all of your debts.
There is also a serious downside where bankruptcy is concerned. Bankruptcy often takes a serious toll on your credit, which can extend for up to 10 years. Even if your credit is already so damaged that the addition of a bankruptcy does not do much to impact your scores, bankruptcy could make it difficult to qualify for new financing for many years to come.
Mortgage Challenges After Bankruptcy
Buying a home after bankruptcy can be tricky, though certainly not impossible. Even if you have taken steps to rebuild your credit after your bankruptcy, your lenders may require a mandatory waiting period before you will be eligible to qualify for a new, post-bankruptcy mortgage.
1. Credit Impact
When you file for bankruptcy, a record of that filing is typically added to your credit reports. Chapter 7 bankruptcies may remain on your credit reports for 10 years from the date filed. Chapter 13 bankruptcies may remain on your credit reports for seven years from the date discharged or 10 years from the date filed, whichever comes first.
NOTE: These are the maximum allowed bankruptcy credit reporting time frames per the Fair Credit Reporting Act. The credit bureaus can certainly choose to remove bankruptcies sooner as a matter of policy.
A bankruptcy may negatively impact your credit scores as long as it remains on your reports. This negative score impact can cause problems whenever you apply for new financing. The good news is that the negative credit score impact will lessen over time. A nine-year-old bankruptcy, for example, will have much less credit score impact than a brand-new bankruptcy.
2. Mandatory Mortgage Waiting Period
Filing for bankruptcy may also affect your ability to qualify for a new mortgage, but not the entire time the bankruptcy remains on your credit reports. The mandatory waiting periods look this this:
- Chapter 13 Bankruptcy (aka Repayment Plan)
If you file a Chapter 13 Bankruptcy you are required to pay back some of your debt over time, typically three to five years. Once you complete your court-ordered payment plan, your bankruptcy will be discharged. With a Chapter 13 bankruptcy you might be able to qualify for certain types of mortgages (FHA, VA and USDA) even while you are still making payments to the bankruptcy trustee, provided the court grants permission and you can meet a lender's minimum qualification standards, including the completion of at least one year of bankruptcy payments. For other mortgage loans (Conventional), however, you still could be required to wait up to two additional years after discharge of your Chapter 13 bankruptcy.
- Chapter 7 Bankruptcy (aka Straight Bankruptcy)
If you qualify for a Chapter 7 bankruptcy, no repayment of your dischargeable debts is required. Instead, your debts are liquidated and discharged by the court immediately. Depending on the type of mortgage you apply for, mandatory waiting periods post-Chapter 7 could range from two years (FHA and VA) to four years (Conventional), unless you qualify for an exception to expedite the process.
Look At The Bright Side
If you made the tough decision to file bankruptcy, it certainly does not mean that you will never be able to qualify for new financing again. In fact, in some scenarios a Chapter 7 bankruptcy will result in a modestly higher credit score because all of the debts associated with your defaulted accounts will be eliminated. And even if you make no effort to rebuild your credit, your scores will improve organically as the bankruptcy ages. You’ll just need to be realistic with your borrowing expectations for the next few years.