After bankruptcy, home ownership may not be as far away as many expect

May 24, 2013

More and more "boomerang" buyers are re-entering the real estate market after going through bankruptcy or foreclosure, the Wall Street Journal reported.

Precise numbers are not available on the trend, according to the report, but interviews with realtors, builders, and other real estate professionals suggest that a significant number of today's homebuyers have bounced back from major financial difficulty within the last several years. By working diligently to rebuild their credit, many people are able to qualify for a mortgage within just a few years after filing for bankruptcy.

How bankruptcy affects credit scores

Although bankruptcy can help some borrowers restore their credit in the long run, it is treated as a negative credit event by reporting agencies and therefore can take a heavy toll on a person's credit rating in the short term.

People who file for bankruptcy may see their credit scores drop substantially at first, and the bankruptcy itself will show up on a filer's credit report for a period of seven to 10 years, depending on the type of bankruptcy. But while the bankruptcy itself will remain on a person's credit report for several years, its effect on his or her credit score will diminish over time.

Take active steps to rebuild credit

People who have filed for bankruptcy can take proactive measures to rebuild their credit more quickly after bankruptcy. For those who do so, bankruptcy can provide an opportunity to begin again with a clean slate, breaking free from the cycle of unpaid debts and building credit again from the ground up.

In order to qualify for a mortgage or other major line of credit after bankruptcy, it is important to establish a reliable pattern of on-time payments and responsible borrowing. This helps reassure potential lenders that the borrower can be relied upon to repay his or her debts after bankruptcy.

Borrow (and repay) wisely to boost credit

One of the most important things that people can do to rebuild credit after bankruptcy is to pay all of their bills on time each month. Additionally, while taking out new debts may seem counterintuitive, it is also important to take out new lines of credit -- and use them responsibly -- to help demonstrate creditworthiness.

When using credit after bankruptcy, there are a few things that borrowers should keep in mind. The most important, of course, is to always pay credit card bills on time. Borrowers should also try to pay more than the minimum amount due on their credit cards each month, and pay off the entire balance every month if possible. Not only will this demonstrate responsible borrowing, but it will help keep the new debt from getting out of hand.

Another important consideration for borrowers after bankruptcy is maintaining a low debt-to-credit ratio. By using only a small portion of their available credit and making sure never to max out their credit cards, borrowers can keep their debt-to-credit ratios small and further improve their attractiveness to potential lenders.

Legal help for questions about debt

If you or a loved one is struggling with unpaid debts and considering bankruptcy as a possible solution, it may be helpful to seek advice from a bankruptcy lawyer. An attorney with experience in bankruptcy law can answer your questions and advise you of the options that are available to you based on your specific circumstances. If you decide to pursue bankruptcy, a knowledgeable attorney will guide you through the bankruptcy process and advocate on your behalf in court.

Article provided by The Slomka Law Firm, P.C.
Visit us at www.slomkalawfirm.com