Both Chapter 11 and Chapter 13 bankruptcy may allow you to modify secured debt contracts, discharge certain unsecured debts that cannot be repaid over the term of the bankruptcy repayment plan, and to keep certain property needed to operate your business. There are some differences between the two bankruptcies, however, which are discussed below.
Filing bankruptcy can be a complicated process, especially if you are trying to file on your own without legal help. Recently on our bankruptcy forum a user asked, “What are the most common mistakes made by bankruptcy filers and what can I do to avoid them?”
Given the increased eligibility requirements for filing Chapter 7 bankruptcy not all filers will have a choice of whether or not to file Chapter 7 or Chapter 13. Recently on our bankruptcy forum a user asked, “I was told that my income was too high to file Chapter 7 bankruptcy. What does this mean and what are my bankruptcy options?”
Chapter 13 bankruptcy may allow you to avoid surrendering your home. For example, assuming you are up to date on your mortgage payments and you continue to pay your mortgage, you can generally keep your home if you file Chapter 13 bankruptcy. What if you are behind on your mortgage payments and owe mortgage arrears? Chapter 13 bankruptcy may also allow you to repay your mortgage arrears within your Chapter 13 bankruptcy repayment plan.
Many debtors have questions about whether filing Chapter 7 bankruptcy is the right choice for them. Recently on our bankruptcy forum a user asked, “If I have I have $6,000 in credit card debt and no income, can I file Chapter 7 bankruptcy?” Although you may be legally allowed to file bankruptcy to discharge $6,000 worth of credit card debt a better question may be whether or not it’s the best option for you. Let’s review some of the issues you should consider prior to filing Chapter 7 bankruptcy.
If you have filed Chapter 7 bankruptcy and your unsecured debts have been discharge this discharge constitutes a permanent statutory injunction prohibiting creditors from taking any further future actions against you. Actions which are prohibited include filing a lawsuit or continuing to harass you for debt payments for the discharged debts. Recently on our bankruptcy forum a user asked, “I recently filed Chapter 7 bankruptcy and a credit card debt for $2,000 was discharged. Unfortunately, the collection agency has continued to attempt to collect the debt. What are my options?”
The statute of limitations on debt collection is the amount of time a creditor has to take legal action against a debtor to sue them to collect for debts owed. Recently on our bankruptcy forum a debtor asked, “If I owe $10,000 to a credit card company in Texas how long does the lender have to sue me to collect the debt?”
Unfortunately, many debtors file for bankruptcy protection without fully considering the serious financial ramifications of their decision. There are certain actions which may become more difficult or impossible at least for a period of time after filing bankruptcy. Recently on our bankruptcy forum a user asked, “Can you buy a house with a bankruptcy on your credit report?”
Bankruptcy on credit report
It will not be possible to buy a home immediately after filing bankruptcy. This does not mean you will never be able to purchase a home, but your ability to borrow money will be limited until you have increased your credit score and the bankruptcy is discharged. So if you have just filed Chapter 7 bankruptcy and the bankruptcy has not been completed a lender will not even speak to you about getting a home loan.
First step to owning a home after bankruptcy
So what do you do first after filing bankruptcy? The first step is to allow time for the bankruptcy discharge. After this is done you need to focus on increasing your credit score through proper preparation, patience, and financial planning. Scrutinize your credit report. Make sure all debts have been properly removed, and there are no errors on your credit report. Check your credit report from all three credit agencies including Equifax, Experian and TransUnion.
Rebuild your credit score
After you have made all necessary corrections to your credit report and insured that all errors have been removed it is time to rebuild your credit score by reestablishing good credit. This can be done by using secured credit cards or taking out a small loan (person loan, car loan or student loan) and making consistent payments over an extended period of time. It is important to make all payments on time.
When can I apply for a home mortgage?
The length of time you will have to wait to buy a home after a bankruptcy will depend on the mortgage program and the lending company. For instance, if you filed Chapter 7 bankruptcy and it has been discharged it could take four years to qualify for a conventional loan and two years to qualify for VA or FHA financing.
If you file Chapter 13 bankruptcy you may qualify for a conventional loan within two years from the date of the discharge. Other loans, such as VA and FHA loans, may be available sooner. If you are in the midst of your Chapter 13 bankruptcy repayment plan you will need to discuss accumulating any debts with the court and get the court’s approval.
Waiting will lower your interest payments
Filing bankruptcy can increase the rate of interest the banks will charge for loaning money. If you can wait at least 24 months following your bankruptcy discharge and increase your credit score you will save money borrowing money. The higher your credit score, the more money you can save. Multiply this over a 30 year mortgage and you could save thousands of dollars.
So whether you can buy a house after filing bankruptcy may not be the right question. A better question may be whether or not you should buy a house before you have taken all the right steps: decreased your debt-to-income ratio, increased the stability and time on your job, saved money in the bank, and paid all of your bills on time for months or maybe even years.