Buying a Home After Bankruptcy

Sometimes a young couple who has struggled for years will finally decide to file bankruptcy.  For a young family the financial difficulty is often a combination of unstable income, medical bills and overextended credit.  While desperate to buy their first home, they have resigned themselves to the belief that the bankruptcy will prevent home ownership for the foreseeable future. 

Not so. 

Most debtors emerge from bankruptcy financially stronger and determined to not repeat past mistakes.  Many debtors who receive bankruptcy discharges have steady jobs, no unsecured debt, and low debt-to-income ratios.  Additionally, a bankruptcy debtor cannot receive a second discharge for several years.  That actually sounds like a good credit risk combination, right?  

The federal government recognizes that a person who has recently discharged unsecured debt through bankruptcy has little debt, but must demonstrate a commitment to managing credit in a responsible manner.  That is why the FHA credit guidelines require the debtor to show two years of responsible credit management after the bankruptcy discharge before it will issue a federal guarantee on a home loan.  It is also possible to obtain a federal guarantee after twelve months, if the debtor can show that the bankruptcy was caused by extenuating circumstances beyond his or her control.  An FHA guarantee means that the lender is guaranteed money if the borrower defaults on the loan.  This federal guarantee makes your loan application more appealing to banks and other lenders. 

Rebuilding your credit report and safeguarding your credit score is very important if you want to buy a house after bankruptcy.  Your bankruptcy attorney can provide helpful tips regarding the rebuilding process and help you on the path to home ownership.

What Is A Reaffirmation Agreement?

A reaffirmation agreement is a new contract between a debtor in bankruptcy and a creditor in which the debtor agrees to continue personal liability on a secured loan and the creditor agrees to not repossess the property.  Reaffirmation agreements are only available to Chapter 7 debtors and the agreement must be executed before the bankruptcy discharge is entered.  The debtor can revoke the agreement with 60 days after the agreement is signed. 

Reaffirmation agreements are typically used to continue payments on secured property the debtor wishes to retain, like a car or house. A debtor that reaffirms a debt is personally liable for any subsequent default on the loan, and can be sued by the lender and the property may be repossessed.  This is a serious consideration since the debtor is not eligible for another Chapter 7 bankruptcy discharge for eight years, and is not eligible for a Chapter 13 discharge for 4 years. 

The Bankruptcy Code requires that the agreement contain many disclosures concerning the contract terms.  The debtor must also file a statement of current income and expenses.  If the debtor’s income after expenses is not enough to pay the monthly loan, the court may decide to not approve the reaffirmation agreement. The debtor’s attorney must also certify to the bankruptcy court that the debtor was advised of the legal effect and consequences of the reaffirmation agreement, and that the reaffirmed debt will not create an undue hardship for the debtor or the debtor’s family.

Since reaffirmation agreements are new contracts, the parties are able to change the terms of the original agreement. This could mean a reduction of principal, interest, or a change in payment length in order to make the monthly payments more affordable to the debtor.  While the reaffirmation process is a voluntary process, the creditor is generally not anxious to repossess the property, and the debtor usually has more leverage in bankruptcy to negotiate a better deal with the creditor. 

If you are considering a bankruptcy and a secured car or house loan, discuss your individual situation with an experienced bankruptcy attorney.  There are many options to retain property both during and after bankruptcy.  Your bankruptcy attorney can help you select the best course of action.

The Consequences of Ignoring Your Debts

I recently read a newspaper advice column written by a Certified Financial Planner who suggested that, as a practical matter, there is no difference between ignoring your credit card debt and filing bankruptcy. Well, let’s look at the “practical effects” of ignoring your credit card debt: 

First, ignoring credit card obligations will cause a persistent series of harassing telephone calls and letters from credit card companies, collection agencies, and finally law firms. Phone calls are systematically made to the debtor’s home and work, and sometimes to third parties including neighbors, extended family, and your employer. The agencies that collect credit card debt are experts at telephone harassment – it is one of their most important weapons. 

Bankruptcy, on the other hand, stops all collection calls. 

Second, your credit score will be ruined on a continuing basis. For each month that a credit card goes unpaid, the creditor will report negatively to the credit reporting bureau. Additionally, collection agencies will often further harm your credit score by “resetting” the date of last activity when the account is transferred to a new collector. 

Bankruptcy stops all negative reporting. Discharged debts should be identified as “Discharged in Bankruptcy” with a zero balance. The debtor’s credit report and score can begin to recover from the date of the bankruptcy discharge. 

Third, you can (and will) be sued. The typical consumer will undoubtedly lose a lawsuit over a legitimate debt. The resulting judgment may include substantial penalties, interest, court fees, and attorney fees. A judgment creditor can collect from your wages, your property, and your bank account. While there are some people who are judgment proof, they are the exception and not the norm. Most people have assets that a judgment creditor can attack. 

Bankruptcy prevents all lawsuits and even stops collection actions from judgment creditors.

Many consumer advocates have likened credit card debt to an illness. Like any illness, the cure is not found in ignoring the problem, which will only make things worse. If you are sick from credit cards and are unable to pay your debts, consult with a bankruptcy attorney and find the cure!

Options When You Have More Month Than Money

Many professionals, including bankruptcy attorneys, will advise a debtor who is unable to pay monthly debts to “investigate your options.” So how many “options” does a person have when there is not enough money to pay the bills?  The answer is: three.  

The first is the “Do Nothing” option.  Debtors who engage in this option hope that by avoiding phone calls and collection letters the debt will somehow just disappear.  That is the same magic that makes a two year old become invisible when she closes her eyes.  Obviously if you won’t see it, the collection companies can’t see it. 

The “Do Nothing” option is the worst option of all because the debt does not disappear. In fact, the debt becomes bigger with increased fees and interest.  Additionally, the debt collection efforts become more aggressive and may result in harassing telephone calls to family, neighbors, or your employer.  Finally, you will likely be sued, your property seized or your income garnished. 

The second option is “Negotiation.”  Many debtors have had positive experience with this option which may include direct negotiation with the creditor for better terms, or help through a third party like a credit counselor or an attorney.  Unfortunately, many people do not realize the consequences of negotiation which may include a resulting tax debt, negative items on a credit report, increased debt through fees and default interest rates, and substantial third party fees. It is well documented by the media and state attorney generals that many debtors that attempt the Negotiation option (e.g. credit counseling, debt settlement, debt negotiation, etc.) end up in worse financial shape because they opted for debt negotiation. If you elect the Negotiation option, hire a qualified and experienced professional. 

The final option is “Bankruptcy.”  Many professionals describe Bankruptcy as the “final option,” but in truth it may be the best option when you cannot pay your bills. Bankruptcy can give an honest debtor breathing room to reorganize debt without the pressures from collection agencies.  Bankruptcy can also legally discharge debt without increased fees or tax consequences.  At the end of a bankruptcy case the debtor can go forward with a “fresh start” and new financial beginning. 

If your family is struggling with more month than money, it is time to examine your options. In the end, choose the option that is best for your family. Speaking with a qualified bankruptcy attorney can answer many of your debt questions.