What a homeowner should know about bankruptcy
admin on January 12th, 2009
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The decision to file for bankruptcy is a tough one for the homeowner, but a choice millions of Americans are making each day as a result of the collapse of the housing market. While contemplating bankruptcy, the major concern of the homeowner is what happens to the home after filing. However, depending on the choice of filing chapter 7 or 13 bankruptcy, the homeowner can decide the fate of the home.
A chapter 13 bankruptcy allows the homeowner to not loose the home. The chapter 13 bankruptcy will reorganize the homeowner’s debt and create a payment plan. The homeowner will be required to provide a financial plan to maintain the home loan, satisfy the court’s payment plan to meet past due balances and any other financial obligations. If a Chapter 7 bankruptcy is chosen, the home will be relinquished to the titled lender and a foreclosure auction will take place after the bankruptcy is discharged. Oftentimes, homeowners file a bankruptcy to stop a foreclosure and allow more time to weigh financial decisions which will decide their home’s fate.
The majority of foreclosed or bankrupt homeowners eventually buy another home after their financial ordeal is long behind them. However, a re-establishment of a financial profile must be planned and properly managed before homeownership is to be re-considered. By rebuilding a credit profile the bankrupt homeowner is evidencing financial responsibility, creditworthiness and increasing the likelihood of purchasing another home sooner rather than later. A substantial savings should be accumulated, as buying a home after bankruptcy may require a larger cash down payment. FHA offers low down-payment mortgage loans and will finance the purchase of a home by a chapter 7 filer in as little as 3 years. In addition, a chapter 13 bankruptcy filer can refinance their existing home out of bankruptcy, as long as there is enough equity in the home to pay the bankruptcy claim. Some private mortgage companies will finance home loans after bankruptcy is filed as long as the borrower can prove to be financially able to afford the mortgage and maintain cash reserves. Anyone considering buying a home after bankruptcy should be mindful that a sizable down payment and higher than market interest rates may be a requirement of the home mortgage.
Bankruptcy can offer the homeowner a way to keep their home when a foreclosure is threatening or allow a homeowner to walk away from their home and gain a fresh financial start. Congress is considering changes to bankruptcy laws to allow the bankruptcy judge to re-write the mortgage terms to meet the present value of the home and the homeowner’s ability to pay for housing. However, the decision to file for bankruptcy should be based on the homeowner’s honest ability to sustain all financial responsibilities and not with the emotional attachment to property.
