Filing for bankruptcy has allowed millions of Americans to walk away from credit card debt, car loans, and even unpaid medical bills. But there there are two kinds of debt that are difficult to discharge in bankruptcy court: mortgages and student loans.
Congress has made it difficult to discharge mortgage and student loan debt in bankruptcy in part because of the widely shared belief that there are societal benefits to promoting home ownership and access to higher education. Home ownership helps Americans build wealth, and educated workers command higher salaries and are better able to compete in the global economy.
Tough restrictions on bankruptcy discharge are one of the factors that keeps investment capital flowing into home loans and student loans, which helps keep them available and affordable for many people.
When millions of Americans found themselves in foreclosure during the height of the mortgage crisis, lawmakers dismissed calls from consumer advocates that bankruptcy judges be allowed to “cram down” mortgage debt.
The lending industry successfully argued that changing the rules after the fact would spook investors in mortgage-backed securities, which is the source of funding for the vast majority of home loans.
Role of private lenders
While the government now funds about 90 percent of student loans directly, private lenders also make loans to borrowers with good credit, often at lower rates than government loans.
As a result, many graduates with strong prospects are refinancing pricey government loans with private lenders. Many of these loans are of such high quality that they can be bundled up and sold to investors, much like mortgages.
WASHINGTON (AP) – Nov. 17, 2014 – The Supreme Court said Monday it will decide whether homeowners who declare bankruptcy can void a second mortgage if the home’s market value has dropped below the amount they owe on the first mortgage.
The justices will consider two appeals from Bank of America, which asserts that bankrupt homeowners should not be able to “strip off” a second loan even if they are underwater on primary loans.
Both cases involve Florida homeowners who were allowed to nullify second loans held by Bank of America. The Atlanta-based 11th U.S. Circuit Court of Appeals affirmed both cases, but Bank of America says the rulings conflict with Supreme Court precedent and every other appeals court that considered the issue.
Bank of America claims hundreds – and possibly thousands – of homeowners in states covered by the 11th Circuit have moved to void underwater second mortgages since the appeals court endorsed the practice two years ago.
“This case presents a critical issue of bankruptcy law affecting a large number of chapter 7 cases,” lawyers for Bank of America said in a court filing. The company urged the high court to clarify the rules “and restore uniformity to the administration of chapter 7 cases across the country.”
About 28 percent of mortgaged houses in Florida are worth substantially less than market value, ranking the state second only to Nevada in underwater mortgages, according to the real-estate-research company RealtyTrac.
Bank of America says in both cases that it loaned money to the debtors secured by a lien on the home. The company argues that even if the primary mortgage is underwater, that has no effect on the lien securing the second loan.
Attorneys for the homeowners argue that none of the other appeals courts dealt with second mortgages “that would be entirely worthless in foreclosure.”
After your chapter 7 bankruptcy has been fully discharged by the court you can apply for a FHA loan after 2 years but you still have to put 3.5 % down to get a mortgage loan from them and pay for mortgage insurance.
For a HUD Rural Development Mortgage, which normally does 100% loans, you have to be fully discharged for 3 full years and still take out high priced mortgage insurance. At most banks, due to the new government restrictions put upon them since the financial collapse, you have to be fully discharged from chapter 7 for 3 full years as well. Some banks view you as a high risk borrower even after 3 years and will not even consider giving you a loan unless you have had several other loans and reestablished your credit rating by paying those bills on time every month and keeping your debt to income ratio very low. In some cases you will be fully discharged for 4 years before they would even consider talking to me about financing my mortgage.
The best thing to do after filing bankruptcy is take out a couple of credit cards, charge small amounts on them and pay regular monthly payments on them every month to reestablish your credit. Maintain small balances only on them at all times because having your debt to credit limit to high will lower your credit score. Another thing to remember is that buying a car or truck and paying your bill on time every month will also improve your credit rating. Bankruptcy is not the end for anyone it is a fresh start to allow you to finally breath and make a new start however you should be very careful when starting to borrow more money after bankruptcy that you do not borrow more than you can pay back on time every month.
When applying for a home loan never give up because eventually you will find a bank willing to give you a home loan, simply be patient and do not give up searching because they are out there. Every bank and lending institution is different and each has their own guidelines and rules they follow about lending, far and above the new Government restrictions placed upon them by the Federal Government, so where one bank may not be able to help you the next one may, just make sure you research each company thoroughly because there are many predatory lenders out there that will rip you off and take thousands of dollars from you just to get you to deal with them.