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Dreaming of homeownership after bankruptcy?

Residents of Massachusetts who recently went through bankruptcy proceedings may not have to wait as long as they might think in order to purchase a home. A common misconception is that a family may have to wait years, or even a decade, in order to convince a bank even to consider offering them a mortgage. In fact, for certain federally subsidized loans, a family who works hard to improve their finances may get approved for a mortgage within one year.

While lending institutions may have certain minimum waiting periods that they typically follow before loaning money to a family that has filed bankruptcy, a number of factors play into how long that family will have to wait for their first post-bankruptcy mortgage. For example, the length of wait may depend on what type of bankruptcy the family files. Would-be lenders tend to look less harshly on a Chapter 13 bankruptcy than the more common Chapter 7 bankruptcy.

In a Chapter 13 bankruptcy, a debtor normally pays at least a portion of his or her unpaid debts through a court-supervised repayment plan. Creditors tend to view these debtors as more "responsible". A Chapter 13 bankruptcy offers debtors in Massachusetts other advantages, as well. Whereas a traditional Chapter 7 or straight bankruptcy usually will not prevent a bank from taking back a house, debtors may find Chapter 13 a useful tool to stop foreclosure. The debtors can use the Chapter 13 process to lump past-due house payments, as well as other debts, into a series of manageable payments.

Hopefully, after a Chapter 13 bankruptcy proceeding, a struggling family will be able to keep paying on their current home and not need to get a new first mortgage following a bankruptcy. Even if they need that new mortgage, however, a Chapter 13 bankruptcy may put them in a position to get the necessary approval more quickly.

Source: The New York Times, "Life after bankruptcy," Vickie Elmer, Sept. 13, 2012

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