By VICKIE ELMER
EVERY month tens of thousands of people file for federal bankruptcy protection, mostly to wipe out debts and start anew.
Many of these filers mistakenly think that it will be many years before they can obtain a mortgage or refinance an existing home loan,
if they ever can — perhaps because notice of a bankruptcy filing
typically stays on a credit report for 7 to 10 years. In reality, they
could become eligible in as little as one year, as long as they work
diligently to improve their financial picture.
Mortgages guaranteed by the Federal Housing Administration are permitted
one year after a consumer exits a Chapter 13 bankruptcy reorganization,
which requires a repayment plan that is often a fraction of what is
owed, and two years after the more common Chapter 7 liquidation, which
discharges most or all debts. Conventional mortgage guidelines from
Fannie Mae and Freddie Mac, meanwhile, call for a wait of two to four
years.
“There’s a lot of other things that go into your ability to get
approved” for a mortgage after a bankruptcy, said John Walsh, the
president of Total Mortgage, a direct lender based in Milford, Conn.
The most important point, he and other industry experts say, is that
consumers re-establish their credit and show that they can manage it
responsibly. They can do this by paying rent and utility bills on time,
or perhaps by obtaining a secured credit card, according to Mr. Walsh.
If a bankruptcy filing was the result of a one-time occurrence, like the
death of a spouse, divorce or illness, the waiting period to apply for a
mortgage may be reduced. Lenders will often want borrowers to write
a hardship letter explaining their situation, backed by documentation
like hospital bills or a court-approved divorce settlement. If the
person has paid back 85 to 95 percent of his debts during the bankruptcy
process, he will need to mention that in the letter as well, said Bruce
Feinstein, a bankruptcy lawyer in Richmond Hill, Queens.
But examples of shortening the waiting period through hardship letters
are “few and far between, and tough to get,” Mr. Walsh said.
Mr. Feinstein says he has seen a few clients qualify for a mortgage only
two years after filing for Chapter 7, though generally borrowers can
obtain a loan quicker after a Chapter 13 reorganization, because of the
partial repayment of debts, he said.
As Mr. Walsh noted, “Chapter 13 is a little more responsible” way to go
from the lenders’ perspective, so lender guidelines are a bit more
lenient.
Almost 70 percent of personal bankruptcies are filed under Chapter 7, according to the American Bankruptcy Institute, a research organization. The institute data
noted that last year there were 1.362 million personal bankruptcy
filings nationwide, down from 1.53 million in 2010, and closer to the
norm over the last 15 years. At the end of the first quarter of this
year there were 311,975 filings, which is 5 percent less than the first
quarter of 2011.
Rebuilding credit after a personal bankruptcy will take some work. Mr.
Feinstein suggests that individuals maintain or take out one or two
credit cards and routinely use them. “If the payment’s due on the first,
make sure it’s paid by the 25th” of the previous month, he said.
A personal bankruptcy filing will have a larger impact on a credit score
than any other credit issue, according to a July report by
VantageScore, which provides credit scores
to lenders. Filing for bankruptcy protection will reduce a credit score
by 200 to 350 or more points, it said, compared with a decline of 80 to
170 points for a foreclosure. VantageScore’s scores range from 501 to 990.
For the larger rival FICO, bankruptcy could cut a credit score by 130 to 240 points.
Copyright 2012 The New York Times Company. All rights reserved.
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