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Pre-foreclosure, bankruptcy can delay return to home ownership

Bankruptcy is meant to give someone a new beginning, a fresh start. By filing for liquidation under Chapter 7 or establishing a repayment plan under Chapter 13, a person who is mired in debt can put the financial crisis behind him and move on -- there is life after bankruptcy.

Bankruptcy is not a "get out of jail free" card, though. The debt is taken care of or the house is saved from foreclosure, but the law requires debtors to take a step back before they take on new debt. The law encourages debtors to regroup by discouraging them from picking up where they left off with the same mindset that resulted in out-of-control finances.

That opportunity to regroup comes in the form of waiting periods for new credit cards, new home and car loans, and the like. For example, mortgage backer Fannie Mae essentially said, "Prove to us for four years that you can manage your budget, and we will approve that loan."  

In some cases, however, that waiting period may feel like a punishment, a hindrance instead of a help. The debtor is prepared and able to take on new debt, but the law makes him wait.

Then there is the problem caused by zombie foreclosures. Homeowners who have lost their homes to foreclosures are surprised to learn that they are still the legal owners. The bank has not transferred title. Their waiting period, then, is delayed until the bank has a buyer. It could be months; it could be years.

Fannie Mae has a partial solution: The agency has changed the post-bankruptcy waiting periods for mortgage loans.

The waiting period for a borrower with a "significant derogatory event" on his or her mortgage credit report is different for each category of event. There is also something called the "extenuating circumstances program" that can reduce the waiting period even more.

We'll get into the details in our next post.


Washington Post, "House Lawyer: New federal loan guidelines ease the sting of ‘zombie foreclosures’," Harvey S. Jacobs, Sept. 25, 2014

Fannie Mae Selling Guide, Sec. B3-5.3-07: Significant Derogatory Credit Events — Waiting Periods and Re-establishing Credit, July 29, 2014

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