Filing for bankruptcy is sometimes necessary to get effective debt relief, but does have serious long-term repercussions which must be considered.

While the thought of ridding yourself of debt and stopping the harassment from creditors may seem like utopia, it does come at a cost. By understanding how bankruptcy will affect your financial status and credit, you can plan properly for starting over.

We all need a place to live, and you may wonder if it will be possible to obtain a mortgage after you’ve been granted debt relief from bankruptcy.

The truth is, the process of getting a home loan is likely to be quite challenging, as bankruptcy can lower your credit scores significantly. Your credit score is integral in being able to obtain any credit at all, from credit cards to home loans.

Did You Know? A bankruptcy remains on your credit reports for up to 10 years.

Applying for a Mortgage

As we’ve stated, getting a loan after a bankruptcy is difficult, but not impossible. However, you will need some time in order to complete the bankruptcy process and begin to reestablish your creditworthiness.

A lender will not even consider your home loan until after your bankruptcy is discharged, meaning a court has ordered your debts to be eliminated. Then they will look at your credit report. If you believe that enough time has passed and that your credit score has gone up sufficiently, be sure to check your report before contacting a lender.

You’ll want to look for mistakes, make sure that all past debt is properly recorded as settled, and that no accounts which were not a part of your settlement are listed. If there are any discrepancies, contact the credit bureau to correct the errors before contacting a lender.

A mortgage lender will want to understand your bankruptcy, so be prepared to provide your date of discharge. The lender will also want to see proof of any efforts you have made to repair your credit, as well as records of your keeping up with your bills post-bankruptcy.

Each type of bankruptcy carries with it different ramifications as to the success of your loan application.

Chapter 7: Liquidation

With a Chapter 7 bankruptcy, you have discharged your unsecured debt, including credit cards, medical bills, unsecured loans and repossession claims. Even though Chapter 7 will remain on your credit report for up to 10 years, a mortgage may be possible.

You’ll be required to have a substantial down payment, and prove that you’ve worked on rebuilding your credit. You will not be able to apply for an FHA or VA loan for two years from your date of discharge; USDA and conventional loans require wait times of three and four years respectively.

Chapter 13: Adjustment of Debts

Chapter 13 bankruptcy offers the opportunity to repay all or some of your debt during a 3-5 year repayment period. The remainder of debt will be discharged when the repayment period is over. Chapter 13 bankruptcy remains on your credit report for up to seven years.

To apply for and obtain a mortgage during Chapter 13 bankruptcy, an individual is required to get permission from the bankruptcy trustee (the court-appointed representative for the creditors who provided oversight of the repayment plan).

The waiting period for USDA, FHA, and VA loans is one year from your discharge date, and two years when obtaining a conventional loan.

If you are considering filing bankruptcy, it is imperative that you seek out expert advice in order to understand not only the process, but how your life will be affected afterwards.

Richard V. Ellis has over 30 years of Sarasota and Bradenton bankruptcy law expertise, and his practice is based on a personal relationship with his clients. Call today for a free initial consultation.