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.
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.
Can I Contribute To My 401K After My 401K Loan Ends While In My Chapter 13 Bankruptcy?
In these times of uncertainty about whether social security will be available in the future, it is more important than ever that contributions to retirement accounts be done. One Judge in the Eastern District of Kentucky has decided that you can contribute to your 401K plan after your 401K loan ends rather than pay the extra amount into your bankruptcy. This is a big change in the practice of Chapter 13 bankruptcy in the Eastern District of Kentucky. In the past the Trustee has required that once a 401K loan is paid off the plan payment would then have to increase by the amount of the monthly 401K loan amount. For debtors who were not contributing to their 401K because of the loan, this meant that they could not contribute to their 401K during the Chapter 13 plan. If a debtor is making a payment on a 401K loan and contributing to the 401K at the same time, this will not apply to that debtor. They will still be required to increase their plan payments when the 401K loan ends.
Example: Debtor is filing a Chapter 13 plan on January 1, 2010 with payments of $500 per month for 5 years. He has a 401K loan of $250 per month that ends in December of 2012. He is not currently contributing to his 401K. The past practice would require that he increase his payment to the Chapter 13 plan in January of 2013 to $750 per month. Under the new opinion, he would not have to increase his payment to the Chapter 13 plan and instead could apply the $250 per month to a 401K contribution.
The Trustee has asked that in these cases the debtor be required to notify the Trustee within 10 days of the ending of the 401K loan with proof that the amount was now being contributed to the 401K. If this does not occur then the debtor may be required to turn over the funds to the Trustee as part of the plan payment.
In Re: Seafort and Schuler 08-22380/08-22417