Mortgage Lending: After Bankruptcy
If you’re thinking about declaring bankruptcy, but you have enough money for a down payment now or can lay your hands on it now, then be cautious. However, if you’re thinking about declaring bankruptcy because you’re flat broke, and you’re looking for a ray of hope, then the news is better. First, the warning. If you have the money for a down payment on a house then you should consider settling with your creditors. Ideally, you should pay all the debt back in full, but a settlement that clears your record now would be far better than a bankruptcy that erases your debt later.
Life after paying off debt is the same situation, more or less, as life after bankruptcy. You can clean up your credit report and still qualify for a home mortgage at reasonable rates.
Consider this:
- Someone else is giving you the money for the down payment. If you file the bankruptcy you will need to disclose to the trustee that you might be receiving a significant cash gift. In this case, bankruptcy might not be an option at all.
The strong likelihood is that if you are in need of bankruptcy relief, and you have cash on hand, you will end up using that cash to pay creditors. However, you might be thinking, “Hey, why not just use my cash to buy the house, use my credit cards to live, and wait a while, file bankruptcy (either Chapter 7 or 13), protect the house, and wipe away my credit card debt?”
People try to take advantage of the system in this way all the time, and sometimes it works. However, under the law that went into effect in October 2005, creditors can make stronger challenges to your bankruptcy. Plus, it’s not that hard to connect the dots. The trustee (and creditors) would see that you just bought a house, yet want to get rid of all your debt. They would see how you used your credit cards in the year prior.
If there are sizable cash advances, purchases at home repair or home appliance stores, or a general pattern of running up debt, the trustee assigned to your case might consider your conduct “abusive.” As a result, you might not be able to discharge some of the recent credit card activity and could be forced to “reaffirm.” This means, you go bankrupt, but once your bankruptcy is over you still have debt. Reaffirmation can force you to pay back a big portion of your debt and, in effect, poorly affect your bankruptcy.
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