When credit card debt goes bad, banks sometimes sell it to vulture investors at a steep discount.  The vulture debt buyer then often tries to sue on the account to collect more than they paid.   And their lawsuits are often the final straw forcing folks bankruptcy, where the debt buyer usually wants a share of any repayment too.

Buying bad — “distressed” — debt is a large, highly automated and risky business.  The debt buyers pay very little and get very little information about the account history, the borrowers, and how the balances are calculated.  And consumers are encouraged to take on faith that the balance was calculated properly — and that the debt buyer is really the owner of the account.  Debt buyers would prefer that courts accept their word of honor too.

The Missouri Supreme Court recently disagreed though.  The Court ruled that a debt buyer had to be able to properly prove it owned an account before it could try to sue to collect the debt.  In effect, it ruled that the court is not simply an extension of the collection process — it is an independent arbiter where a case must be proven, not presumed.

That would seem like a simple idea, right?  How can you sue over a loan if you can’t prove you are the one owed any money?  It’s a simple idea at the heart of all court cases.  It’s called “standing,” which comes from the old idea that you have to have a right to “stand” in court to ask for help from a judge.  Standing is so fundamental that federal rules (based on the Constitution) as well as Missouri law say that a party’s standing to be in court is always subject to review by the court and cannot be waived by another party.

In the 2012 Missouri case, the court ruled that a debt buyer had to be able to provide testimony from the original lender how the records of the account and transfer to the final alleged owner were prepared.  In other words, they could rely on business records from other companies — but those companies needed to provide witnesses to testify how those records were created and kept in order to use them in court.  The debt buyer couldn’t simply use its own record-keepers — even if they knew how the bank usually did its work — to “authenticate” another company’s records.

This should not be hard to understand.  I can’t testify from first-hand knowledge how my neighbor balances his checkbook unless I sat there and watched him do it.   I might know he’s an accountant and very careful and, in my opinion, would not lie.  But how do I know how he did the math last week?

It would be surprising if any court let me testify about something like that.  But judges sometimes see complicated business records like credit card account sales deals and assume everything was proper, and forget that they should not assume anything.  In the case of debt buyers who are not original lenders, a “bill of sale” of a huge list of accounts  does not prove standing to be in their courtrooms asking for the time of day.

The problem here is identical to the problem of “robo-signing” and fraudulent or non-existent mortgage foreclosure documents.  The mortgage industry is simply a variety of debt buyer.  Most of the mortgage loans are not owned by  the original lender and proving that they own the loan and have the right — standing — to enforce it is how they got into so much trouble in the last couple years.

All of this begs the question how some courts can allow debt buyers to have claims in a bankruptcy case, or prosecute motions for relief from stay, if they can’t prove ownership of the loans.  Some courts have asserted that the debtor putting this information on their schedules amounts to admission they owe the money.  The state supreme court concluded that standing can’t be granted by a party but is fundamental to invoke the courts’ power.  So it remains to be seen if more bankruptcy courts will take up concerns about standing in the future.

Photo Credit:  The National Archives

Buy a home after bankruptcy?  Seems like a stretch for all but those who win the lottery once the discharge is issued.  But play your cards right and you could be worrying about scheduling a closing date sooner than you ever thought possible.

After filing bankruptcy, you’re debt free.  No more calls, no more lawsuits.  Suddenly, the world feels a bit brighter and filled with possibilities.  You start looking around your rental and thinking you might want to buy a home.

In order to buy a home after filing bankruptcy, you’re going to need to worry about two things.  They are:

1. Your level of savings; and
2. Your credit score.

Your Savings Account (The Downpayment)

In order to buy a home, you must have a downpayment.  Though the land of $0 down mortgages was wonderful for a time, it’s gone now.  And if there’s a broker willing to do the deal for you, run the other way.  When you don’t have a downpayment, you run the risk of going upside down on your mortgage the first time the Federal Reserve Bank chairman catches the sniffles.  Definitely bad idea.

Spend the first year or so after filing bankruptcy focusing on your savings account.  Sock away every spare dollar, and then some.  Cut your cable or satellite television, consider ditching the landline phone in favor of the cell, and turn off your lights when you leave the room to save on electricity.

Clip coupons.  Lots of them.

If you can, grow something useful in the garden rather than pretty flowers that can’t feed you.

If you want to buy a home, you need money.  Lots of it.  Save every dollar you can.

Your Credit Score

Going through bankruptcy will hit your credit score to the tune of about 150 points. Doesn’t sound like a lot, but when you remember your credit score tops out at 850 and seldom goes below 400 unless you’ve somehow lost your pulse, it’s pretty big.

You’re going to want to get to work on repairing the damage, and fast.

First thing to remember is that you must continue to pay your debts on time. If you’ve got student loans or a car loan, make those payments without fail. The student lender will report that positive payment stream, though the car lender may not unless you reaffirmed the debt. No reaffirmation? No problem – just keep copies of the cancelled checks and ask the finance company for a payment history before you go to the mortgage broker.

Next is that different mortgage companies may look to different credit reporting agencies – each of which may list different obligations. Some may list your utility payments, others may have the rent bill to the landlord. Keep on top of it all after filing bankruptcy to maximize the chances you can buy that dream home. You also want to check your credit reports after bankruptcy to make sure they reflect your debt-free world.

Finally, consider a single credit card after bankruptcy. Use it every month, then pay it off over a 2-month period to ensure that the payments show up on your credit report. That’s going to raise your score as well.

You can buy a home after filing bankruptcy, but the upshot is that you need to take some time to build yourself back up. Don’t rush it – Rome wasn’t built in a day. With hard work, however, you’ll get there just fine.

Jay S. Fleischman is a bankruptcy lawyer who helps people fight back against debt collection harassment.

One of the concerns about filing for bankruptcy is that those folks will never be able to obtain credit again after filing for bankruptcy protection and assistance.     Most times, nothing could be further from the truth as bankruptcy may actually improve folks’ credit score, according to my clients’ experiences (and as explained by Smart Money on their website).  Every debt collection note on a credit report, every late payment, every negative notation affects a debtor’s credit score.   Bankruptcy?  It doesn’t add to the negative credit score; it replaces a number of negatives with ONE negative notation of “discharged in bankruptcy” with the account showing a “zero” balance.   That act usually improves a debtor’s credit score.   As my colleague Doug Jacobs stated in his article on this site, debtors should list all of their debts to insure that a financial fresh start is obtained.  There are a number of other ways to improve your credit score.

Post-bankruptcy, acting carefully in making financial decisions improves a debtor’s credit rating according to Liz Weston of MSN Money.   Jennifer Weston mentions eight credit repair tips in her blog:

1.  after your bankruptcy is discharged, check your credit report for errors

2. check  your report again

3.  make a budget and stick to it

4.  be careful when applying for new credit

5.  use the automatic payment function on credit so that  you won’t (ever) forget to make a payment

6.  if you have student loans, make SURE you make those payments on time (this will help rebuild your credit)

7.   apply for a secured credit card (where you deposit money against future charges)

8.  when you do obtain new credit (and you will), do NOT max out the cards.   Credit rating is affected by amount of credit available ratio to credit used.

Using the above tips, a diligent debtor will find that even a mortgage is obtainable quickly after filing for bankruptcy, according to Craig Andresen, my Minnesota colleague.   Folks who educate themselves about the ways to protect themselves and who act wisely will find that their credit score improves rapidly.

Most folks are entitled to receive one free credit report each year.  Those reports can be obtained through www.annualcreditreport.com or by going to each of the three credit reporting agencies:

Experian

Equifax

Transunion

In addition, there are three check/bank account reporting agencies:

Telecheck

Chex Systems

Early Warning Services

Debtors who have had returned checks or overdrawn checking accounts and who find themselves turned down for a new account should obtain a copy (also free) of their report from those agencies as well.

Image credit:  Andres Ruedas under Creative Commons license/Flickr

Why would anyone take out an Internet payday loan?  Bankruptcy lawyers scream this out loud at least once a week.  It tends to frighten the neighbors.

Small, high interest loans are often the last gasp effort folks use to make payments on other debt (like mortgage or car loans) — before they give in and call a bankruptcy lawyer for help.  They’re the proverbial “last straw.”  But they also can make your life a living hell — and cleaning up your finances a nightmare.

“Payday loans” are basically high interest small loans — $3-500 often — where the borrower promises to pay the loan off in a short period of time, often when their next payday comes.  In local offices, it’s usually “secured” by a post-dated check.  Over the Internet, you agree in advance to have the payment plus interest deducted electronically from your bank account.

Post-dated checks are bad enough — bankruptcy law allows them to be cashed even after you file a case.  But giving out your bank account information to a website and authorizing that faceless site to deduct money from your account?  Your mother didn’t raise you right, if that doesn’t worry you.

If you take out a loan from a store down the street, you know how to find them.  Do you know how to find the lender you take out an Internet loan from?  Sure, in some cases the website is just another outlet for a business that has actual street addresses and phone numbers. You can see them on the website and you can find their business registered in their respective states.  That is a lender trying to play by the rules.

But often the Internet lender has no physical location mentioned anywhere on the website — and their website ownership and registration is masked behind privacy services too.   It turns out quite a few of these are offshore, outside the United States often theoretically existing in places like Malta or Caribbean island countries, which offer drop box address services so it becomes almost impossible to locate a person or business.  They are corporate phantoms that infest the Web, obeying only the laws of the most convenient forum, if even those.

And you would like to take a loan out from them?  And give them access to your bank account?   It’s like giving your bank account a financial virus.

When you file bankruptcy, it’s even harder to deal with them.  I spend a lot of time trying to find anything like a valid address for these companies to send written notices.  Or FAX them.  Or, sometimes, to even e-mail them information to stop collecting debts.  Of course, if I do track them down and give them notice and they ignore it, what can I do?  Sue them?  That’s hard without anyone I can actually serve papers to — and even harder to collect from them when I win.

It means, effectively, they obey bankruptcy law only if they feel like it.

Most states regulate — more or less — small lenders like these.  They often have very liberal rules allowing them to get away with lending terms that make a loan shark blush.  But at least they’re here and we can find them.

Borrowing from “some guy” who registered a business last month on the Island of Lost Dreams, and built a payday loan webpage — and wants to keep his name, address and phone number out of this?  And giving him all of your most personal financial information?  How crazy does that sound?

It’s a business that should not even exist if people did not go a little crazy when they’re desperate for money.  That it is thriving and there are (at least) thousands of these websites tells you a lot about economic desperation these days.

Image Created on Street Sign Generator.

The headline caught my eye: “Is Bankruptcy ‘Business as Usual’ for Airlines.’ ”  On NPR, no less.  Reporting on the Chapter 11 filed by American Airlines, the article goes on to note:

You might say it’s almost business as usual for the airline industry. United, Northwest and Delta have all taxied down the Chapter 11 tarmac. US Airways did it twice in as many years.

Airlines use Chapter 11 as a normal business tool, like raising prices (baggage fees, anyone?) and layoffs. So do auto manufacturers, restaurant chains, department store chains, grocery store chains.  Even municipalities and churches are using bankruptcy to restructure their debt, in an attempt to stay afloat and continue to operate.  As noted in the NPR piece, there used to be a much greater stigma attached to Chapter 11 filings; now it seems to cause barely a ripple.

Yet while bankruptcy has become business as usual for businesses and even governments, personal bankruptcies are still highly stigmatized.  In more than twenty years of bankruptcy practice, I don’t think I’ve met more than a hand-full of people who aren’t troubled, or even traumatized, by the prospect of facing bankruptcy, even if their bankruptcies are the result, direct or indirect, of the actions of their banks, or employers, or health care providers.  Individual debtors facing bankruptcy often feel further traumatized by a system which treats them as inept at best, or foolish or criminal at worst.

Yet such attitudes are actually foreign to the foundations of bankruptcy laws in this country.  First and foremost is the recognition that allowing people, as well as businesses, to restructure their debt is productive for all of us.  Having learned something from the debtors’ prisons and colonies of Europe, as well as the “broken bench” of the guild system, both of which left a debtor’s family dependent on the alms of the church or wards of the state, our founders realized that a system which allows an honest debtor to periodically discharge overwhelming debt, and retain the tools to support his family and rebuild his financial future is a better outcome for us all.  And perhaps the single-most important premise underlying bankruptcy laws today is the idea that only an “honest but unfortunate” debtor is eligible for a bankruptcy discharge.

So, at a time of almost unprecedented financial hardship for individuals, and at a time when businesses use bankruptcy as just another way to improve their bottom line, shouldn’t the stigma associated with bankruptcy be fading?  Maybe so, but it hasn’t.  All my clients struggle with the morality of the decision to file bankruptcy; virtually all of them wait too long, and suffer either emotionally or financially as a result.    Personally, I admire them for it, even when I wish they would let me help.  And, though I understand that a corporation doesn’t have morals, or a conscience, the people who run them do, and I could wish some of them were a bit more like my clients.  But I also think it is important to consider the source of your financial problems in deciding whether to file bankruptcy.  If you are an honest but unfortunate person, who is dealing with an overwhelming debt load because of job loss, illness or medical expenses, divorce, or any of a dozen other reasons that are, to one extent or another, out of your control, come see me or one of my colleagues.  Like the airlines, manufacturers, retailers and municipalities, you may also benefit from bankruptcy.  Bankruptcy is a legitimate way to a more productive life.

Bankruptcy is not a dirty word.

Photo: drbimages/iStock

Credit card debt remains a primary reason that folks call me to ask for a financial problem evaluation issues.   Generally bankruptcy constitutes one option but by no means is Chapter 7 or Chapter 13 the only option.

Recently I met with a very nice woman who owes around $6,000 in credit card debt, but not much else.  After talking to her, we both agreed that bankruptcy did not make sense for this small amount of debt.   There is, by the way, no “minimum” amount of debt that would disqualify you from filing bankruptcy but given that the attorney’s fee cost of Chapter 7 usually exceeds $1,000 and the attorney’s fee cost of Chapter 13 can exceed $3,000, it hardly makes sense to file a bankruptcy if you debt is not significant.

In my office, I use a rule of thumb that if a client has less than $25,000 of unsecured obligations (like credit card debt), I am going to discourage a bankruptcy filing unless circumstances really dictate otherwise.   I know other lawyers who will rarely file cases when the debt involved is less than $50,000, while others have no “soft” limits.

In any case, my potential client and I agreed that bankruptcy did not make sense for her, so the next step was to decide how to proceed.  In this case, she had already been sued by her credit card company – the plaintiff’s lawyer is a high volume collection firm that files hundreds of credit card debt collection cases every week.

When she came to meet with me, my client had already received a proposed “Consent Judgment” from the plaintiff’s lawyer.  The terms of this judgment included:

1. the plaintiff would take a judgment that would be recorded on the county record
2. the judgment included interest of $850, attorney’s fees of $620 and court costs
3. post judgment interest would continue to accrue “at the legal rate”
4. plaintiff agreed not to file any wage garnishment if defendant paid $500 by the end of the month and monthly payments of $150 thereafter due on the 31st of each month

She asked me what I thought about this proposal.   I advised her that had I been involved in negotiations from the time the debt went into default, here is what I would have liked to have seen:

• no lawsuit at all – ideally, I would have worked out a payment plan directly with the credit card company and avoided the lawsuit and its negative credit implications
• assuming that a lawsuit was filed, I would have explored whether there were any Fair Debt Collection Practice defenses and perhaps I would have filed an answer asserting all available defenses available under Georgia law.   I know that volume collection lawyers make their money on default judgments.  By filing an answer along with interrogatories, requests for production of documents and requests for admissions, I know that this file would be pulled and sent to one of the senior partners at the collection firm.  If there were any irregularities, it is likely that the plaintiff would dismiss its lawsuit.  At the very least, I would force the plaintiff’s firm to provide documentation of the debt and thus increase my leverage for a more favorable settlement
• I would negotiate to avoid a judgment.  Most courts allow a Consent Order which provides that a judgment will be issued if certain events happen.  In other words, the Order would provide that my client needs to pay $500 by a date certain and monthly payments thereafter.  If she did not pay, then a judgment would issue along with other consequences.   I have negotiated Orders that provide for a dismissal of the action within a few months if the defendant performs certain actions.  Such an Order would likely have much less negative impact on my client’s credit report than a judgment.
• I would build into the terms a “second chance.”  In other words, the Order (or judgment) could provide that if the defendant missed a payment, it could open default by paying a small penalty fee within a certain number of days.  This would protect my client against an immediate default in the event of unforeseen circumstances.
• I would negotiate more favorable terms.  In a consent agreement, everything is negotiable.  Perhaps the plaintiff would discount the full amount of the credit card debt with an up front payment of a certain amount.  Interest and attorney’s fees are always negotiable.  Given that the plaintiff would receive nothing in a Chapter 7, I would use the threat of bankruptcy as a tool to reduce the amount owed and to ask for better terms.
• I would provide that upon payoff, the plaintiff would take affirmative steps to restore my client’s credit.

Obviously, many of the demands I would have made would have been more timely had I been retained early on in the process.  In this case, my client did not want to spend any money with me to negotiate so she essentially accepted the terms of the plaintiff’s Consent Judgment.

The lesson we can all learn from this case include:

• begin negotiations as early as possible – don’t wait to get sued
• everything in a collection negotiation is negotiable – don’t assume that the collector or its lawyer will say “no.”
• make the collection law firm earn its money.  You have the right to demand proof of the debt they claim you owe and the credit card company’s lack of paperwork can serve as your leverage for a better settlement
• if bankruptcy is an option, you can use it as a tool in your negotiations.  Don’t be surprised, however, if the creditor calls your bluff
• when negotiating, avoid making the discussions personal.  Keep the tone of your negotiations businesslike and avoid the psychological tricks used by bill collectors

Have you negotiated with credit card companies and/or their lawyers?  What has your experience been like?

You tried every possible way to avoid it, but you finally decided that you had no choice–you filed a bankruptcy.  But you want to continue to pay some creditors, like your house payment and your car payment.  But when you go to make a payment online, or set up a bank draft, you find that your lender won’t let you do it.

It’s tempting to think that they want you to default so they can take your stuff, but I really don’t think that’s the case.  There is a reason why lenders won’t set up automatic payments, or continue to draft payments that you always paid that way, or sometimes even send you bills.  That reason is based in the automatic stay provisions of the Bankruptcy Code, which is one of the most powerful protections offered by the Code, and one of the main reasons people file bankruptcy.

The automatic stay provided for in section 362 of the Bankruptcy Code is effectively a court order that goes into effect, automatically, as the name would suggest, when the case is filed.  The automatic stay prevents creditors taking any action to collect a debt, including asking you to make a payment (i.e., send a bill) or draft your bank account.  So, in order to avoid even a technical violation of the stay, lenders will stop sending bills, stop drafting payments, and even stop allowing you to make online payment, depending on the type of draft.

Trust me, they want you to make your payments.  you may just have to do it the old fashioned way–by check or money order.

Photo credit: iStock/bluestocking

Some banks recently started charging debit card use and other fees. (For more, see this post by Andy Miofsky, and my earlier one.)

The New York Times recently reported how the practical problem of changing an online account from one bank to another contributes to how some banks now charging debit card use fees are keeping some dissatisfied customers: Online Banking Keeps Customers on Hook For Fees.  Customers can feel trapped because of the problems they have or think they have in starting a new online account.

I just did this. I changed from one bank to another financial institution (credit unions can be good choices, too) because of new fees (not debit card use fees, as I do not use debit cards, but relating to minimum balance requirement) that the new bank does not add.  These financial institutions do exist –  look for them! My new one is even more conveniently located than the old and has better customer service than the old.

But it can be true that if you are already set up at one place with online banking, it is a pain to redo it all. BUT I will also attest that it can be done.  Work carefully, methodically, and ask the financial institution’s technical support whatever questions you have, and you will succeed.

I decided to move accounts not only to save myself some money, but also because I wanted the old bank to lose my business. I am not sympathetic to its policy decisions — maybe it had good reasons, but I am not aware of them. There wasn’t even much if any explanation (and not much notice) before the bank’s policy changed about why the bank believed this was an acceptable change.  In the end, the move cost me time and some irritation, but I feel I was putting my money where my “mouth” was.

Words are powerful.  The word “bankruptcy” carries enormous emotional baggage.  People hear it and immediately jump to conclusions.  “Failure,” “shame,” “irresponsibility,” “ruin” all come to mind.

Recently, I met with an elderly couple.  They had significant cash flow problems, and a Chapter 13 bankruptcy would benefit them greatly.  As I do with all prospective clients, I gave them the initial disclosures required by the Bankruptcy Code along with my “non fee agreement fee agreement.” I call it that because it’s simply a required agreement which says that their first consultation is free. It’s silly, but required by the Bankruptcy Code.

The reason they would not sign either document became immediately clear.  The first thing they said was, “We’re not here to discuss bankruptcy!”

And then Steve Jobs died a few days later

Admittedly, I’m shifting gears a bit, but bear with me.  We all know Steve Jobs passed away this past week.  I can’t add anything meaningful to the accolades others have deservedly heaped upon him.  I’ve got an iPhone, an iPad, an iPod, and, of course, an iMac.  We all know how good these products are and how much we love them and the way Apple supports them.  I also have work computers on which I run Windows 7, and Steve Jobs and the folks at Apple made Windows better as well–albeit indirectly.

When we think of Steve Jobs, we think of a lot of things.  Bankruptcy, however, is certainly not a word which comes to mind.  After all, Jobs and Apple have been a success.  Money has been made and investors paid–in heaps.

But What If Things Had Been Different?

In the 90s, Apple wasn’t the household name it is today.  Most believed that PCs would continue to dominate the market (I did) and that Apple would shrivel up and remain a tiny company with only a niche market.  What if Apple needed to file bankruptcy to stay alive while it reinvented itself?  Would it have filed bankruptcy–even with all the emotional baggage and stigma?  I think so.

One of the many insightful things Steve Jobs said is this:  “Your time is limited, so don’t waste it living someone else’s life.  Don’t be trapped by dogma, which is living with the results of other people’s thinking.  Don’t let the noise of others’ opinions drown out your own inner voice.”

Did you hear that?

“Don’t be trapped by dogma, which is living with the results of other people’s thinking.” Isn’t that exactly what these older folks were doing?  (“Bankruptcy means we’re ruined.”  “Bankruptcy means we’re a failure.” “Bankruptcy is immoral.”  “Bankruptcy will hurt our credit.”  “Bankruptcy is not an option.”)

We need another word!

I wish we could come up with another word for bankruptcy.  Companies do it.  It was “Kentucky Fried Chicken” and now it’s “KFC.”  (Fried is bad–emotional reaction averted.)  Maybe we could call it a “financial petition” or something like that?

In the meantime bankruptcy is bankruptcy.  And a rose by any other name is still a rose.  Don’t be trapped by dogma when it comes to your financial options.  Steve Jobs most certainly wouldn’t have been.

One of the things that troubles those considering filing personal bankruptcy is the fear that it might be impossible to qualify for a home mortgage after a chapter 7 or 13 case.  Indeed, it would be a cruel irony if a bankruptcy filing freed you at last from a heavy debt burden, enabling you to finally afford a house payment, only to find that you were now a member of a no-credit underclass, shunned forever by mortgage lenders, permanently consigned to a cot in your parents’ basement.

If this has been a factor in your thinking about bankruptcy, there is good news for you: the federal home mortgage guaranty agency says that bankruptcy will not stop you from qualifying for a mortgage to buy a home.  Better still, you don’t have to rely on this writer’s credentials or anecdotal evidence to know that bankruptcy won’t stop you from buying a home.  FHA and HUD regulations, publicly available to anyone who cares to look, say in so many words that a chapter 7 or 13 filing will not disqualify a borrower from eligibility for an FHA-insured mortgage.

Regarding chapter 7 bankruptcy, HUD Guideline 4155.1 : 4.C.2.g provides:

A Chapter 7 bankruptcy (liquidation) does not disqualify a borrower from obtaining an FHA-insured mortgage if at least two years have elapsed since the date of the discharge of the bankruptcy.

During this time, the borrower must have

• re-established good credit, or
• chosen not to incur new credit obligations.

An elapsed period of less than two years, but not less than 12 months, may be acceptable for an FHA-insured mortgage, if the borrower

• can show that the bankruptcy was caused by extenuating circumstances beyond his/her control, and
• has since exhibited a documented ability to manage his/her financial affairs in a responsible manner.

Note:  The lender must document that the borrower’s current situation indicates that the events which led to the bankruptcy are not likely to recur.

Regarding chapter 13 bankruptcy, HUD Guideline 4155.1 : 4.C.2.h provides:

A Chapter 13 bankruptcy does not disqualify a borrower from obtaining an FHA-insured mortgage, provided that the lender documents that

• one year of the pay-out period under the bankruptcy has elapsed
• the borrower’s payment performance has been satisfactory and all required payments have been made on time, and
• the borrower has received written permission from bankruptcy court to enter into the mortgage transaction.

TOTAL Scorecard Accept/Approve Recommendation

Lender documentation must show two years from the discharge date of a Chapter 13 bankruptcy.  If the Chapter 13 bankruptcy has not been discharged for a minimum period of two years, the loan must be downgraded to a Refer and evaluated by a Direct Endorsement (DE) underwriter.

Reference:  For more information on the TOTAL Scorecard recommendations, see the TOTAL Mortgage Scorecard User Guide.

What’s more, because bankruptcy usually relieves you of most or all of your monthly debt payments, the above regulations make clear that filing bankruptcy could actually help you to qualify for an FHA mortgage, rather than preventing you from qualifying.  This would be true for those whose monthly debt payments leave them with insufficient income to pay a mortgage, but for whom a bankruptcy filing would eliminate those monthly payments, freeing up the disposable income necessary to qualify for the monthly mortgage payment.

Additionally, if you are not a first time home buyer, you should be aware that conventional mortgage lenders typically follow regulations similar to those followed by HUD and the FHA.

This doesn’t mean that everyone who wants to buy a home should file bankruptcy first, but it does mean that persons considering bankruptcy can be free of the fear that a bankruptcy filing will prevent them from ever qualifying for a mortgage.