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Bankruptcy and Your Credit — Part 2

Saturday, October 23rd, 2010

So you have filed for a bankruptcy, now what? Probably the first question in your mind is how will it affect my credit score? There are too many factors to accurately predict the fallout on your credit report. If you had a pretty high score prior to filing you may find that your score is still hovering around in the 600’s. However most people’s credit gets pretty trashed from lates and charge offs, so their score after filing is closer to 500 than 600.

The total number of credit accounts you have is a factor as well as the ratio of debt to available credit. Both those can sink your score in a hurry, especially when you pile up a chapter 13 or 7 on top of it.

So, which is better, chapter 7 or chapter 13? I am not a lawyer so I cannot answer that question and it should be put to bankruptcy lawyers.

What I do know is that there are a few advantages to chapter 7 over chapter 13. If you file a chapter 7 the process is quick, usually from 3 to 6 months. You get your discharge date rapidly and you are on your way to starting over, and with no debt hanging over your heads. If you file chapter 13 you are required to pay off your debts in 3-5 years. Most people who file chapter 13 do not complete the program and find themselves in hot water again. If you file chapter 7 you still get to keep most of your assets including the home you live in. Keep in mind, not everyone qualifies for chapter 7 and that is something you will have to research with bankruptcy attorneys.

Remember, just because you have a BK on your report that doesn’t mean you cannot refinance or purchase a new home. Check around with different lenders and let them know all the facts up front before you allow anyone to check your credit. You may be in for a pleasant surprise.

Related Link: Bankruptcy and Your Credit — Part 1

Bankruptcy and Your Credit — Part 1

Saturday, October 23rd, 2010

This is a big topic so I will try and break it down in a couple articles. Rather than focus on what your score may be after going through a bankruptcy, I am going to tell you how lenders view a borrower who has a BK (bankruptcy) on their report.

Of course everyone wants to know, how long do I have to wait before I can refinance or purchase a home? The answer is, quite often there is no set time you have to wait. Bear in mind that it will stay on your credit report for up to 10 years so get used to it.

All lenders have a bottom credit score they work with and that is usually 500. As long as your bankruptcy doesn’t lower your score beneath that floor, you may be in business. In fact, many lenders will still work with you even if your BK has not been discharged yet. Make the call and you will find a consultant that will be eager to push your loan through if there is any way possible to do it. If you filed a chapter 13 it will have to be paid off with the loan. You will also have to get a rating from the Trustee. That rating is much like your mortgage rating and if you do not have any late payments you may still be able to get your loan. However, if you do have late bankruptcy payments, that is kind of your last chance and you will have a tough time getting the loan.

The one factor that prevents many borrowers from getting a loan is the LTV (Loan to Value) that is allowed under the underwriters guidelines. If you have a recent BK many lenders will not let you borrow more than 60% of the home’s value. Some lenders are a little more forgiving so you will just have to check around. Some lenders will not let you get any cash out which will not work if you have filed a chapter 13 because you have to pay off the debt you own to your various lenders. If you have filed a chapter 7, wait till the discharge date has passed and it will be a lot easier to get the loan and you may find lenders who are willing to give you cash out, or at least let you borrow up to 80% of your home’s value.

Bottom line, having a bankruptcy does not necessarily prevent you from getting your loan. If you can wait, the one year mark is a magic number for many lenders and you will find them more agreeable after that date has passed.

Related Link: Bankruptcy and Your Credit — Part 2

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