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.
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.
Is There Any Way You Can Get Rid Of A Second Mortgage By Filing Bankruptcy?
The short answer is NO if you file a Chapter 7 bankruptcy unless you are surrendering your house. However, if you want to keep your house, you might be able to strip off the second mortgage if you file a Chapter 13 bankruptcy. It works like this. Under current bankruptcy law there is no mechanism to modify a first mortgage secured by a debtor’s home. However, many homeowners have found relief for their home mortgage woes by filing a Chapter 13 bankruptcy case, which allows a bankruptcy judge to strip away an entirely unsecured second mortgage lien.
For example, let’s say you purchased your home for $400,000, and obtained two mortgage loans. Today your home is worth $300,000 and you owe $305,000 on the first mortgage and $70,000 on the second. During a Chapter 13 bankruptcy case a bankruptcy court can strip away the second mortgage lien on your home because it is entirely unsecured by your home (i.e. the value of your home is not more than the first mortgage debt). The above example is only possible when the second mortgage is not secured at all by the value of the home. If the home is merely under-secured, lien stripping is not authorized. For instance, if the value of the home in our example is $305,001, then the loan is partially secured (by one dollar) and its second mortgage lien cannot be stripped.
By stripping the lien from your home, the second mortgage loan becomes an unsecured, non-mortgage debt. Unsecured debts receive the lowest payment priority during a Chapter 13 bankruptcy and typically receive pennies on the dollar, if anything. If you believe that Chapter 13 bankruptcy lien stripping could benefit you and your family, call me at 339-0222 so that I can advise as to whether you can strip off your second mortgage.
Chapter 13 Bankruptcy: Living Expenses – Need vs. Want
When people consider filing for relief under Chapter 13 of the Bankruptcy Code they are typically consumed with the debts they owe, creditor harassment, and just making it day to day. Because this can be overwhelming, seeking counsel from an attorney can help put things into perspective.
Some people do not think in terms of needs and wants when it comes to considering bankruptcy or even spending and living on a budget. However, this is a major part of what Chapter 13 bankruptcy helps to accomplish. In the bankruptcy world, a person’s expenses are looked at in two categories – necessary and non-necessary for reorganization purposes. A necessary expense would be defined as food, clothing, and shelter. Non-necessary expenses would be things such as cable, internet, gym memberships, etc. People must begin to put their expenses in perspective and make tough decisions like whether to keep their home or surrender it or whether they can afford to keep their children in a private school which clearly is a non-necessary expense.
For illustration purposes, let’s look at expenses for food, clothing and other items based on the IRS National Standards for Allowable Living Expenses in bankruptcy cases filed on or after March 15, 2009. Per month, a household of two people can spend $537.00 for food, $66.00 for housekeeping supplies, $162.00 for clothing and services, $59.00 for personal care products & services and $197.00 for miscellaneous expenses. These items become budgeted expenses in the sense that you are now limited to what you are allowed to spend on certain things. Reality sets in quickly and it sometimes stirs up anger or bitterness in Chapter 13 cases when someone must be told that they have to remove their children from private school or give up the RV used for vacation or the boat used for recreation. Remember, usually these issues only come up when someone files a Chapter 13 seeking to pay unsecured creditors less than 100%.
Anyone who files a bankruptcy is subject to these expense limits and must follow the confines of the law and the applicable rules if they want the benefits that bankruptcy offers. In other words, you have to take the good with the bad. Because we must follow the IRS expense guidelines, a person can be forced to give up property in bankruptcy and/or reduce their spending in they want the benefits of a Chapter 13 reorganization. So keep this in mind when you elect to file a Chapter 13 and attempt to pay your unsecured creditors less than 100%.
Question: When should you consider filing for bankruptcy relief?
There is no perfect time to file for bankruptcy. Everyone’s situation is different, but the best time to seek legal advice is when you first become aware that you are unable to pay your bills on a timely basis or when you begin to receive phone calls from creditors. Debt can easily accumulate if you lose your job, incur unforeseen medical bills, run up credit card obligations or take undue risk with investment opportunities.
Even if you have waited until a judgment has been entered against you or your wages are about to be garnished, you can still file bankruptcy to stop the garnishment and obtain a fresh start … free of debt.
From a credit standpoint, filing for bankruptcy eliminates most if not all of your debt which allows you to begin the rebuilding of your credit. Most individuals can obtain good financing terms on a future loan within two years of filing for bankruptcy so long as their credit score has improved after the filing.
Because the stress can be overwhelming, you should seek the advice of a reputable bankruptcy law firm. They will outline your financial options and help you manage or eliminate your outstanding debt. It’s a great feeling knowing that you will soon be on the road to financial recovery.