What Bankruptcy Means in Real Estate
Bankruptcy is an unfortunate part of our financial society. When an individual or business is faced with a financial crisis, there are two alternatives to choose from. There is foreclosure, and then there is bankruptcy. Both have different meanings when it comes to real estate, so it’s important to know what exactly bankruptcy means.
While foreclosure is a forfeiture of a home to the mortgage lender through defaulting. This helps satisfy the past due balance, and should be avoided at all costs if necessary. Bankruptcy is different in that it gives the person or business a new start. This can allow for a discharge of debts by forming a repayment plan of the debts.
New home after bankruptcy
While trying to find a new home for purchase after a foreclosure can be extremely difficult, there is still plenty of hope after a bankruptcy. Filing Chapter 7 or 13 bankruptcy can block the ability to borrow money or use any credit cards. Credit scores will take a huge hit and it can take years to rebuild the credit back up to a point where mortgages or credit cards are possible.
With good preparation and planning, though, purchasing a home is certainly not out of the realm of possibility. Two years after a discharged bankruptcy is the most common length of time that real estate agents will say is the necessary waiting time to apply for a mortgage. This will be when interest rates are made available at a more desirable level, so it’s best to wait that length of time.
To start rebuilding credit scores after bankruptcy, you will have to show that you are able to be trusted now with a loan and your ability to pay back. Secured credit cards are a good start, and you can place a credit limit of your own choosing by issuing a deposit on the card. Another way is by installment loans that you make payments on each month. This can either be a personal loan, car loan or student loan.
Some laws regarding bankruptcy and real estate
Keeping your home under your mortgage is standard when it comes to Chapter 13 bankruptcies. Chapter 7 bankruptcy will have a significant impact on real estate, as selling off property is necessary to repay debts.
According to law: In a Chapter 7 bankruptcy, you can only keep real estate if it falls under a state exemption. “The most important exemption is the homestead exemption, which allows you to keep real estate that you occupy, as long as the value of the home is less than the exemption amount. Somewhat confusingly, California law provides two different sets of exemptions. You can choose one bundle of exemptions or the other, but cannot mix and match the individual exemptions in each bundle. In the first bundle, the homestead exemption is worth $50,000 for a single person, while in the second bundle the homestead exemption is worth only $20,725. If your home value exceeds the homestead exemption amount, then the bankruptcy trustee will sell your home and give you cash equal to the homestead exemption amount. As a practical matter, there is no protection for real estate that you don't occupy as your residence.”
If home equity (the difference between the amount owed and the market value) is less than homestead exemption, then Chapter 7 bankruptcy will allow one to keep the home. If the equity is higher than the homestead exemption, the home will be sold and the lendee will be given cash that is equal to the homestead exemption amount.
Declaring bankruptcy is a big step, but if the proper methods are taken, then keeping your home is a realistic scenario. Always contact a lawyer to find out which method is going to be the best, and which will set you up best for the future.
The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.