Types

• There are two kinds of bankruptcies for the general public: Chapter 7 and Chapter 13. Chapter 7 liquidates debts, while Chapter 13 provides a court-negotiated three- to five-year repayment plan. Because a Chapter 7 allows certain individuals to "walk away" from their debts, credit reporting agencies treat these bankruptcies harshly and leave them on a person's credit record for 10 years. Chapter 13 bankruptcy, however, permits creditors to recover some money and shows a willingness on the consumer's part to take responsibility of her debts. Credit reporting agencies usually remove a discharged Chapter 13 seven years after the filing date because of that, even though they can legally wait 10 years.
  
  

Considerations

• Federal Housing Administration (FHA) loans feature more forgiving credit guidelines. Because of this, FHA loans permit those individuals who are still in the repayment period of a Chapter 13 bankruptcy to qualify for an FHA loan under certain conditions. A borrower in Chapter 13 who has been making prompt payments as agreed for at least one year is eligible for an FHA loan, provided he is able to meet standard qualification requirements. This includes a solid income source, financial ability to repay the loan and the reestablishment of a good credit history since the bankruptcy. The borrower must also provide a complete written explanation of the bankruptcy for the loan application.
  
  

Significance

• The FHA requires the lender to process the file through manually review by an underwriter. The underwriter considers approval on an individual basis. This could take more time than a typical loan transaction. It may also involve additional paperwork or documentation as requested by the loan underwriter.
  
  

Effects

• An individual in a Chapter 13 bankruptcy must have court trustee approval for any new credit, including mortgages. The FHA won't guarantee a loan for a Chapter 13 borrower without the written permission of his court trustee. Failure to get written permission will not only disqualify him for the loan, but getting any kind of credit without court approval could jeopardize the status of his bankruptcy status. He will also have to return anything he has purchased, possibly losing any money he's invested in the purchase.
  
  

Court Trustee Approval

• To get court trustee permission, according to United States statute, a borrower must file a motion through her attorney, explaining the type of credit she's trying to get and why she needs it. The borrower must show that she's able to afford the payments and that the new debt won't affect her ability to make her court-ordered debt payments. If the sale of the borrower's current home is part of the transaction, the sale must have approval as well. The process may take as long as two months before the judge approves the trustee's decision and signs off on the transaction.