Bankruptcy is more common than many Pennsylvania consumers might think. In 2019 alone, over 770,000 Americans filed. Bankruptcy is a very important form of legal protection. In effect, it allows people who find themselves in financial trouble to hit the reset button and move on with their lives. That said, it can be difficult to secure loans for large purchases like homes after a bankruptcy. Your chances of getting a mortgage will largely depend on when you filed for bankruptcy and what kind of loan you’re seeking.
Different types of bankruptcies
Bankruptcy can take several forms under federal law. Most individuals will apply for Chapter 7 or Chapter 13 bankruptcy. Chapter 11 is talked about a lot in the news. But that form of bankruptcy is usually only utilized by businesses or very high net worth individuals.
People who file for Chapter 13 are arranging to pay off all or part of their debts. They typically do this with what’s known as a wage-earner’s plan. Making all of their scheduled payments typically takes debtors between three to five years. Lenders usually view Chapter 13 bankruptcy as less serious than Chapter 7. Depending on whether the court dismisses or discharges the bankruptcy, it can take two or four years to get a conventional home loan after filing for Chapter 13.
Chapter 7 bankruptcy involves liquidation. Many of the debtors’ belongings are sold to pay off creditors. Chapter 7 is the most popular form of bankruptcy in the U.S., but it has a big, negative effect on the debtor’s credit score. Conventional lenders may approve mortgages four years after a Chapter 7 bankruptcy is discharged.
Conventional loans come from institutions like credit unions and banks. Government loans through organizations like the FHA or VA may be available to people who’ve filed for bankruptcy a year before conventional loans.