How Bleak are Your Chances of Obtaining a Mortgage After Bankruptcy?

Most people dread bankruptcy and the stigma attached to it. There are many who worry about the impact of a bankruptcy on their ability to obtain a mortgage in the future. However, the future may not be as bleak as it seems for people who file for bankruptcy. It definitely doesn’t ruin your chances of getting a mortgage or owning a home. There is still hope after bankruptcy.

Most people obtain mortgages backed by Fannie Mae or the Federal Housing Administration (FHA). FHA provides mortgage insurance that protects lenders against losses as a result of default by home owners. Both Fannie Mae and FHA mortgages could be obtained after a bankruptcy filing. The chances of obtain a mortgage after a bankruptcy may even be better for bankruptcy filers than homeowners in foreclosure.

When comparing the impact of bankruptcy and foreclosure, you should consider which one makes it more difficult to obtain a Fannie Mae or FHA mortgage. Bankruptcy may stand out on your credit report for 10 years but your chances of owning your own home may not be doomed for so long. You could bounce back within a year after a bankruptcy filing with an FHA mortgage or a mortgage backed by Fannie Mae in about two years.

Chapter 13 bankruptcy filers could obtain an FHA mortgage after a one year waiting period. New FHA guidelines allow for Chapter 13 bankruptcy filers if chapter 13 payments have been consistently made on time for a period of at least one year, and court approval is obtained. Chapter 7 bankruptcy filers have to wait a minimum of two years from the date of discharge which is should not be confused with the date of filing.

Under Fannie Mae guidelines the waiting period for a mortgage for people who obtained a discharge in a chapter 13 bankruptcy is two years. If the chapter 13 case is dismissed the debtor has to wait four years for a mortgage under the Fannie Mae guidelines. For those who file Chapter 7 bankruptcy, the waiting period is four years from the discharge or dismissal date of the bankruptcy action. Chapter 7 and chapter 13 bankruptcy filers who could prove extenuating circumstances, are treated as exceptions. Debtors who fall within this exception have a two-year waiting period in cases where four years would normally apply.

Previously, borrowers were ineligible for a new FHA loan for three years after a foreclosure, short sale, or deed in lieu of foreclosure and two years after a Chapter 7 bankruptcy. The FHA reduced the waiting period to one year if you can show you went through a foreclosure, short sale, bankruptcy, or deed in lieu of foreclosure due to an external economic event, like a loss of income or employment. To be eligible, you must prove that you are back on track financially and meeting the following criteria.

  1. You experienced a major economic event such as a job loss or severe reduction in income of 20% for at least six months, which was the main reason you lost your home.
  2. You can demonstrate that you have since fully recovered. To do this, you must show that you are employed and able to afford loan payments once again.
  3. Your credit score was satisfactory before the economic event with no late payments or other major derogatory credit issues.
  4. Your credit score must be satisfactory for the past 12 months.
  5. You must complete a one-hour one-on-one housing counseling session with a HUD-approved housing counseling agency. The counseling must address the cause of the economic event, as well as the actions taken to overcome the economic event and reduce the likelihood of re-occurrence. It must be completed a minimum of 30 days, but no more than 6 months, prior to submitting a loan application to a lender and can be done in person, via telephone, via internet, or other methods approved by HUD.

Under the Fannie Mae guidelines the waiting period for people who find themselves in foreclosure is seven years. This is measured from the date the foreclosure is concluded. The exception provided for in extenuating circumstances is three years. If a mortgage debt was discharged through a bankruptcy, the bankruptcy waiting periods may be applied if the lender obtains the appropriate documentation to verify that the mortgage obligation was discharged in the bankruptcy. Otherwise, the greater of the applicable bankruptcy or foreclosure waiting periods is applied.


Consequences of Employees Bankruptcy to Employers

Employers often pay little attention to the bankruptcy filings of their employee. This failure is a blunder that could have serious consequences. As an employer you need to be aware of several issues may arise from the filing of bankruptcy by an employee. Under the Bankruptcy Code, an employer may owe certain duties to the bankrupt employee and other parties interested in the bankruptcy, such as the employee’s creditors and the bankruptcy trustee. An employer therefore, needs to have an understanding of these duties and put in place policies to spot these issues when they arise.

No Discrimination Against Bankruptcy

All employers should always be aware that employers are prohibited from discriminating against employees or potential employees who have filed for bankruptcy. Section 525 of the Bankruptcy Code expressly prohibits employers from terminating the employment or discriminating with respect employment of individuals who are or have been a debtor in bankruptcy or on the basis of an employee or potential employee’s association with a bankrupt.

Employer’s are also forbidden from considering the pre-bankruptcy insolvency of in making employment decisions. See 11 U.S.C. § 525.

Employers must therefore, institute policies to protect employees who file for bankruptcy from discrimination at the work place. Without a clear policy, there may be confusion with respect to how bankrupt employees are treated by supervisors and managers. There may also be consequences with respect to potential employees. If the issue of bankruptcy is NOT handled properly during the hiring process  the employer may be exposed serious legal consequences.

Wage Order Obligations

In a Chapter 13 reorganization case filed by an employee, the employer may be subject to a wage order that requires the employer to remit a portion of the employee’s wages to the Chapter 13 trustee. The employer should therefore, show active interest in the bankruptcy cases of its employees, looking out for orders and issues that impact the employer/employee relationship.

There may also be instances where an current employee who files for bankruptcy is subject to a garnishment of his his or her wages.  The employer needs to take special care in such circumstances of conflict between the order that garnishes the employee’s wages and the automatic stay that comes into existence in a bankruptcy. While continuing to garnish an employee’s wages may violate an the automatic stay this may NOT always be the case and before disobeying the garnishment order the employer needs to clarify and be certain as what its obligations are.

Employer’s should have procedures in place to addresses these issues quickly so that it does NOT find itself faced with contempt for violating a valid court order. If the employer is unsure as to its obligation it could seek an comfort order from the bankruptcy as to whether the automatic stay is in force as to the garnishment order. A comfort order if usually sought when there is uncertainty as to as to whether a bankruptcy injunction applies to to the collection or enforcement of certain debts.

Contract Employee Present Special Circumstances

Employers should be aware that pre-bankruptcy contractual obligations by a debtor may be avoided. The employer should therefore, pay careful attention to bankruptcy of employees who have unexpired contracts. This is particularly so if the employee has received an advance on the contract for work that has NOT been provided at the time of the bankruptcy filing.