Will an unpaid bankruptcy settlement make it harder for us to buy a home?
Q. My husband and I filed for bankruptcy seven years ago. We were making the monthly payment, but in the third year of repayment I lost my job. The bankruptcy was filed in Alabama and we were living in California. I tried to pay my monthly payment with my unemployment check, but due to my family obligations, it became a strain to make the payments. One year later my husband lost his job, and our remaining balance went unpaid. Since the bankruptcy, we now pay cash for all purchases. We have a car loan, but no other debts or credit cards. We are renters in the state of California, and we would like to stop wasting money and someday purchase a home. How will the unpaid bankruptcy settlement affect our ability to purchase a home in the future?
A. Your legal problems will not prevent you from buying a home. What will be affected is the interest rate you will be charged. A low credit score puts you in the market for a subprime loan, which means you could be paying 14% on your mortgage instead of 6% if your report were clean.
We consulted bankruptcy attorney Leon Bayer of Bayer, Wishman & Leotta in Los Angeles for advice on your situation. "It sounds like the bankruptcy case was probably dismissed for nonpayment approximately 4 years ago," he said, adding that the court's protection (called an "automatic stay") ended with the dismissal, allowing creditors to resume collection of the debts when the automatic stay was terminated. But it sounds like they did not choose to do so.
"Ignoring a debt is usually asking for bigger trouble later on," Bayer explained, "but most states have a statute of limitations, which protects people from being sued indefinitely on a debt after the passage of certain established time limits. It sounds like some or all of the debts involved here may now so old that lawsuits can't be brought on them anymore." He based this on the assumption that the case was dismissed four years ago, and you live in California.
"Either way," he concluded, "it sounds like it has been more than four years on these debts."
Regarding the bankruptcy appearing on your credit report, he said, "The bankruptcy filing will remain on someone's credit record for up to 10 years from the date it was filed. However, if the case was a Chapter 13, some credit bureaus will only report it for 7 years." He noted, however, that they can leave it on for 10 years if they want to.
"Any old debts remaining on the report might be disputed with the credit bureau that issued the report, and will probably be removed. I would not be surprised if most or even all of their debts have now disappeared from their credit report," according to Bayer.
So it sounds like your bankruptcy might be off your credit report already, and if it isn't, it is old enough not to cause big problems. A conventional lender wants to see four years between the discharge and the mortgage application and you are well past that.
This brings us to what you have to do now in order to buy a home. You have to establish good credit.
- Get free credit reports for both you and your husband from the three major credit reporting agencies at: https://www.annualcreditreport.com/cra/index.jsp.
- Go through each report item by item to see if and how your bankruptcy is being reported. Make sure there are no errors about that or any other item -- there often are. If you find a mistake there is a place on the report that will tell you how to correct it.
- Start re-establishing your credit. Making on-time car payments is a good start. But you should also apply for a credit card. If you are turned down for a regular one, see if you can get a secured card. Make one purchase each month (charge one tank of gas, for example) using your credit card and then pay it off the next month. This will be another way to establish a track record of on-time payments. If you pay for utilities at your apartment, be sure to pay those bills on time, too, as they are reported.
- Once you have taken care of any credit problems and are establishing a history of on-time payment you can go to www.myfico.com and get a copy of your FICO score from one of the credit reporting agencies. When you get to the site, click on "shop" at the top of the page and then scroll down to FICO Standard. That will give you a good idea of where you stand as far as your credit history goes. FICO scores range from 300 to 850, with anything above 720 considered very good. Anything below 620 will make getting a mortgage expensive. FICO has a mortgage chart on the home page showing how a high FICO score saves you money.
These are things you can do today to rebuild your credit and qualify for a more affordable home loan when you're ready to buy.