A bankruptcy may impede your financing of a residential property for a period of 2 to 4 years subsequent to the discharge of the bankruptcy. Government (VA, FHA and USDA) loan program guidelines are generally in the low end of that time period range and conventional loan program guidelines are generally in the upper end of that range, with debt reorganization plans viewed more favorably than debt discharge plans. Below is helpful information about bankruptcy from the Federal Trade Commission, ftc.gov:

Personal bankruptcy generally is considered the debt management option of last resort because the results are long-lasting and far-reaching. A bankruptcy stays on your credit report for 10 years, and can make it difficult to obtain credit, buy a home, get life insurance, or sometimes get a job. Still, it is a legal procedure that offers a fresh start for people who can't satisfy their debts. People who follow the bankruptcy rules receive a discharge — a court order that says they don't have to repay certain debts.

The consequences of bankruptcy are significant and require careful consideration. Congress made sweeping changes to the bankruptcy laws effective October of 2005.. The net effect of these changes is to give consumers more incentive to seek bankruptcy relief under Chapter 13 rather than Chapter 7. Chapter 13 allows you, if you have a steady income, to keep property, such as a mortgaged house or car, that you might otherwise lose. In Chapter 13, the court approves a repayment plan that allows you to use your future income to pay off your debts during a three-to-five-year period, rather than surrender any property. After you have made all the payments under the plan, you receive a discharge of your debts.

Chapter 7, known as straight bankruptcy, involves the sale of all assets that are not exempt. Exempt property may include cars, work-related tools, and basic household furnishings. Some of your property may be sold by a court-appointed official — a trustee — or turned over to your creditors. The new bankruptcy laws have changed the time period during which you can receive a discharge through Chapter 7. You now must wait eight years after receiving a discharge in Chapter 7 before you can file again under that chapter. The Chapter 13 waiting period is much shorter and can be as little as two years between filings.

Both types of bankruptcy may get rid of unsecured debts and stop foreclosures, repossessions, garnishments, utility shut-offs, and debt collection activities. Both also provide exemptions that allow you to keep certain assets, although exemption amounts vary by state. Personal bankruptcy does not erase child support, alimony, fines, taxes, and student loan obligations. Also, unless you have an acceptable plan to catch up on your debt under Chapter 13, bankruptcy usually does not allow you to keep property when your creditor has an unpaid mortgage or security lien on it.

(However, if a consumer’s home or automobile loans are not seriously delinquent and they have the ability to catch up and maintain current payments, their primary residence and financed automobiles can certainly be retained even under a Chapter 7 bankruptcy. In this situation, the liquidation of unsecured debts may allow the consumer’s mortgage payments on their residential and automotive loans to be much more easily managed post-bankruptcy.)

Another major change to the bankruptcy laws involves certain hurdles that you must clear before even filing for bankruptcy, no matter what the chapter. You must get credit counseling from a government-approved organization within six months before you file for any bankruptcy relief. You can find a state-by-state list of government-approved organizations at usdoj.gov/ust. That is the website of the U.S. Trustee Program, the organization within the U.S. Department of Justice that supervises bankruptcy cases and trustees. Also, before you file a Chapter 7 bankruptcy case, you must satisfy a “means test.” This test requires you to confirm that your income does not exceed a certain amount. The amount varies by state and is publicized by the U.S. Trustee Program at usdoj.gov/ust.

For more information, see “Before You File for Personal Bankruptcy: Information About Credit Counseling” and “Debtor Education, Knee Deep in Debt”, and “Fiscal Fitness: Choosing a Credit Counselor” at ftc.gov/credit.

David Griffin has been financing homes in Macon, Warner Robins and all of Middle Georgia since 1983 and is a member of the Mortgage Bankers Association of Georgia, mbag.org. For an archive of past articles visit the Consumer Information section of mbag.org. (11/2/10)