In a Chapter 13 bankruptcy, your goal is to pay off what you owe over time on a court-approved payment schedule. The nice thing about Chapter 13 bankruptcy is that it does allow you to settle for less than you owe in most cases, and you have an end-date in sight for your debts. Within three to five years, you’ll walk away free and clear.
After a Chapter 13 bankruptcy, you may be looking into getting a new home, but with a bankruptcy on your credit, that can be tough. Fortunately, it usually only takes between two and four years before you can get a mortgage with a decent rate. Until then, building your credit back up and making sure you make your payments on time is the key.
How much does bankruptcy damage your credit?
A typical bankruptcy damages your credit by between 200 and 300 points. If you have a credit score between 620 and 650, you may be able to get a high-rate loan, but if you want the best rates, you’ll need a rating of 760 or higher. With a bankruptcy, you could have a lower score for longer, which means that buying a home will cost more even if you do get a loan.
A Chapter 13 bankruptcy remains on your credit report for seven years. Since Chapter 13 bankruptcy does require you to pay back a portion of what you owed, you may be able to get a Federal Housing Administration (FHA) loan as soon as a year after filing for Chapter 13 (not a year after it is resolved). Remember that every lender is different, so it may take some time before you find one that is willing to work with you.
While some people believe that bankruptcy will make it so that they can never own a home again, that simply isn’t the truth. With bankruptcy, you may have limitations in the short-term, but if you continue to do well in building up your credit and follow the court’s rules, you’ll be able to look for a loan and get a decent rate in the future.