Tag Archive for 'bankruptcy'

It's fairly common knowledge that bankruptcy can drop your credit score by hundreds of points and render you ineligible for a new mortgage for several years. You may have resigned yourself to renting for the foreseeable future. But you might not have to.

The reason for your bankruptcy filing has a big influence on how much grief lenders will give you about your next home purchase or refinance. For example, FHA's guidelines normally require that you put at least two years' distance between your mortgage application and your bankruptcy discharge. You will also have to prove that you have established good repayment habits and demonstrate financial responsibility, preferably by saving some money.

But FHA allows some applicants to be approved as soon as 12 months after filing for bankruptcy! FHA's underwriting guidelines state that:

"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 circumstancesbeyond his/her control, and
?? has since exhibited a documented ability to manage his/her financial affairs in a responsible manner.

In addition, a Chapter 13 bankruptcy is treated more leniently than most Chapter 7s, as you are making a commitment to repay some or all of your obligation. FHA says:

"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 payout period under the bankruptcy has elapsed, and
?? the borrower’s payment performance has been satisfactory and all required payments have been made on time.

The borrower must receive written permission from the court to enter into the mortgage transaction.

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

However, don't expect any mercy if your difficulties were the result of laziness sending your payments or financial mismanagement. To catch a break from an FHA lender:

* Document the cause of your financial difficulty (a medical emergency? unemployment?).

* Prove that the problem has been solved (for example, your medical bills were discharged in the bankruptcy, your income is sufficient to cover your expenses, and you can show that you have paid your bills on time).

* Demonstrate that you have taken steps to prevent the same difficulty recurring (you have purchased medical insurance).

And keep in mind that FHA has this to say about people who don't have a good excuse for their bad credit:

"If a borrower’s credit history, despite adequate income to support obligations, reflects continuous low payments, judgments, and delinquent accounts, significant compensating actors will be necessary to approve the loan." Remember that FHA, like God, only helps those who help themselves.

FICO has finally disclosed how much late payments, maxed out credit accounts, or more serious mishaps can damage your credit score. You know paying late is bad for your score, but now you know how bad. Paying thirty days late can drop your score 60 to 80 points. Even if you pay on time, maxing out your card can drop your score 10 to 45 points.The good news? This kind of hit can be put behind you relatively quickly--your most recent history counts most when it comes to calculating your scores. Also, paying late enough to incur a late charge but less than thirty days late does NOT get reported to credit bureaus and does NOT impact your score.

FICO refers to these hits as "damage points" and they are subtracted from your score if you do not pay as agreed or appear to be in financial trouble (which is what maxing out available credit implies). Great credit scores require not only paying on time every month, but using credit conservatively--carrying low or no balances and only using a few accounts.

FICO scores range from 300 to 850, and these days it takes a score of 720-740 or better to be eligible for the best mortgage interest rates. While FHA itself doesn't have hard-and-fast credit score rules, many FHA lenders do-you want a score of at least 620 to be eligible with many lenders.

Your payment history accounts for 35% of your credit score. Here is how the following events affect you if your score is 680:

1. 30 day late payment: subtract 60 to 80 points.
2. Debt settlement: subtract 45 to 65 points (but keep in mind that most debt settlement companies have to stop making payments for several months before attempting to settle your debts, so the hit to your score from several months of non-payment can be hundreds of points).
3. Foreclosure:subtract 85 to 105 points (but again, most people in foreclosure miss a few payments before this happens--so the score can go significantly lower than this).
4. Bankruptcy: subtract 130 to 150 points, plus whatever penalties you incur for paying late before filing.

Those with higher scores can see bigger drops in their scores from the same events. If your score is 780 instead of 680, expect a bankruptcy to drop your score a whopping 220 to 240 points. Note that most bankruptcies start with several months' of missed payments, so by the time you get around to filing your score could go considerably lower than 130-150 points. If bankruptcy or foreclosure is in your future, you can minimize the impact by making your payments on time up to the day you file.

Another part of your score is credit utilization--the idea being that financially responsible people use credit for convenience, not because they are spending more than they earn. Using a large chunk of your available credit or carrying balances month after month is a good sign that your earnings are not keeping up with your spending. That's why maxing out a card triggers a 10 to 45 point drop in your FICO score.

Some events that can cause your score to drop aren't even in your control. It's been all over the news--credit card companies have been cutting customers' credit lines like crazy. Thirty-three million had their credit lines reduced an average of $5,100 between October 2008 and April 2009. Twenty-four million of these people had excellent payment records with average FICO scores of 760, according to the Washington Post. And unfortunately, a drop in available credit automatically increases your credit utilization ratio and can drop your score.

Of course, knowing the impact on a FICO score and actually avoiding credit boogers are two different things. You can't get blood from a turnip, and people witout jobs can't pay their bills like they used to.

While knowing the numbers may not be able to help you keep your score high if your job evaporates, the information may help you make the best decision in the face of financial tragedy--for example, it may be preferable to file for bankruptcy protection immediately rather than pay your bills late for six months and then have to file anyway. Or raid your savings to make your minimum payments no matter what until you find a new job. Protecting your credit score as best you can is important for your long-term financial future.

The chairman of the House of Representatives Financial Services Committee said that he plans to keep working on legislation to reduce mortgage balances via bankruptcy proceedings, and that the lame performance of lenders, some of which received taxpayer bailout funds and have yet to modify a single mortgage, increases the support for that legislation. "The best lobbyists we have for getting bankruptcy legislation passed are the servicers who are not doing a very good job of modifying mortgages," Representative Barney Frank asserted in a subcommittee hearing. "If they do not improve their performance then they improve their chances of that legislation."

So if your lender is dragging its feet and you are pulling your hair out trying to get your loan modified, you may soon have the US Bankruptcy Court on your side. Today, while filing for bankruptcy won't stop a foreclosure forever, it does create what is called an automatic stay. The lender has to show a judge why that stay should be lifted before it can go forward with foreclosure proceedings. And if the lender is too busy to return phone calls or take care of its regular business, odds are good that it may not want to have to go to court to prove that you owe and can't possibly pay.

If you show that a Making Home Affordable modification would make your payment feasible, especially if your other obligations are discharged through a bankruptcy, the judge may well put an end to your foreclosure woes. Try running the numbers through mortgage calculators--if by dropping your rate to 2% your housing expense would be reduced to 31% of your gross monthly income, you have an excellent chance of keeping your home. But if your income has been reduced to the point that you can't even come close to affording your home, the lender will likely be allowed to foreclose.

While bankruptcy doesn't carry the same stigma that it used to, the idea of filing for Chapter 7 or 13 protection from creditors fills many with fear and even shame. It needn't. In fact, in may be the best way to keep your home if you own one and inflict the least amount of damage to your credit score. The key is to act quickly when you get that pink slip or those divorce papers. Months of waiting, avoiding the mailbox and screening your calls will only make things far worse -- a clean break may be the best route. For example:

Working as a loan officer, I had a recently-divorced client come in who had always had good credit. When she realized that a creditor of her ex-husband's was coming after her for a six-figure debt, she promptly got a lawyer and filed for bankruptcy relief. She reinstated all of her own debts and continued to pay them as agreed. The bankruptcy discharged the ex-husband's obligation and she was approved for a mortgage within months. What my client did that was so smart was that she didn't wait until she had missed a bunch of payments on this debt -- she halted it right away and her credit score remained in the 700s.

Denial results in all kinds of evils -- foreclosures when you don't want to talk to your loan servicer, late or missing payments, and credit scores that can even make it harder to get a new job after losing the old one. By facing the problem and asking for help -- from your creditors, a credit counseling service, or an attorney -- you can solve the problem quickly and limit the damage.