Bankruptcy is a credit-killer, right? Not necessarily. If your choices are to file for bankruptcy protection, getting your finances under control or racking up late payments, missed payments, collections and judgments, bankruptcy can be far easier to put behind you.

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Bankruptcy is like cutting off an arm

There's a reason that in war movies they always do the anesthesia-free amputations quick--because although it's not painless it's a lot better than slowly hacking at bone and flesh until the limb drops off. So if you've got a lot of expenses and no way to meet them (you're unemployed, for example, and the credit cards you've been living on are maxed out) filing quickly can minimize the credit fallout and get you relief fast. I have personally seen clients (who paid their bills on time every time but filed when they had to) with 700+ credit scores six months after filing a bankruptcy!

Minimizing the damage of bankruptcy

Keeping your score as high as possible is important because lenders that approve home loans for people with bad credit left the building years ago, and those that approve mortgages after bankruptcy do impose minimum credit score requirements. With that in mind, you'll want to reestablish credit as soon as you have the income to do so. That may mean opening a secured credit card (make sure the creditor reports to credit bureaus) or reaffirming an existing secured debt like your car loan and making the payments on time.

Mortgage approval during bankruptcy. Really!

The type of bankruptcy you file makes a huge difference in the way mortgage lenders and other creditors treat you. Chapter 13, which sets you up on an affordable payment plan and requires you to repay some of what you owe, is viewed much more favorable than Chapter 7, which discharges all of your eligible debt immediately. Filing a Chapter 7 puts most mortgage financing out of your reach for a minimum of 2 years (FHA) or 4 years (Fannie Mae). This period may be halved if the bankruptcy is due to extenuating circumstances like illness.

However, if you filed a Chapter 13 bankruptcy, Fannie Mae allows mortgage approval 2 years after its discharge. FHA allows you to take out a mortgage as long as you have made at least 12 monthly plan payments on-time. The Bankruptcy Trustee must approve your purchase or mortgage refinance.