Brian

Federal Student Loan Collections Resume May 5 — What Borrowers Need to Know Now

Summary:

After a five-year pause, the U.S. Department of Education has announced it will resume collections on defaulted federal student loans starting May 5, 2025. Millions of borrowers are at risk of wage garnishment, tax refund seizures, and damage to credit scores unless they take immediate action. Here’s what this means and how our firm can help.

Key Points Borrowers Must Know:

Collections Restart May 5, 2025:
The federal government will begin involuntary collections, including wage garnishments and Treasury offsets, on defaulted student loans beginning May 5. This marks the first resumption of collections since March 2020.
Who Is Affected Most:
This primarily impacts the 9 million borrowers who are either in default or late-stage delinquency (91–180 days past due). These individuals face the most urgent risk of involuntary collection actions.
Borrowers Will Be Notified:
The Department of Education will email affected borrowers over the next two weeks. Later this summer, notices of administrative wage garnishment will follow.
No More Mass Forgiveness:
The Department has made clear: there will be no broad loan forgiveness. Supreme Court rulings and policy shifts have halted plans like Biden’s SAVE plan and the $20,000 forgiveness initiative.
What Happens If You Don’t Act:
If borrowers fail to respond, they may experience automatic paycheck deductions, seizure of tax refunds, and damage to their credit — potentially affecting housing, car purchases, and more.
Rehabilitation and Income-Driven Options Are Available:
Borrowers can avoid collections by:
- Rehabilitating their loan (make 9 voluntary payments to exit default)
- Consolidating their loans
- Enrolling in Income-Driven Repayment (IDR) plans like PAYE or IBR
- Using tools like the Loan Simulator and new AI assistant Aiden to explore options at StudentAid.gov/end-default
Processing Delays Still Exist:
As of April, the Department still has not resumed processing IDR applications submitted since August 2024. Processing is expected to begin again next month — but borrowers should act now to prepare.
Impact on Borrowers and the Economy:
Experts warn that many borrowers have been out of the repayment habit for nearly five years. Sudden re-entry may destabilize budgets, and missed payments could send credit scores plummeting — especially harmful for those already in financial hardship.
Legal Support Can Help:
Borrowers overwhelmed by collections, garnishments, or unaffordable payments may qualify for bankruptcy protections, especially under Chapter 13 plans that can restructure or even discharge certain student loans under new legal standards.
We’re Here to Help:
Our firm understands the evolving legal and financial landscape for student loan borrowers. Whether you’re facing default, harassment by collectors, or need relief through bankruptcy, we can help you explore your options and protect your financial future.

Final Thoughts:

Student loan collections are back — and they’re not waiting.
If you’re struggling with federal student loan debt, now is the time to act. Contact our office to speak with an attorney who understands the intersection of student loan collections and bankruptcy protections. Don’t wait for garnishments or offsets — let’s get ahead of the crisis together.

This post is for informational purposes only and does not constitute legal advice. For personalized assistance, consult a licensed bankruptcy attorney.

Why Choose Us?

Expertise and Experience: Our attorneys have decades of experience in both commercial litigation and bankruptcy law, offering deep insights and proven strategies.
Client-Centered Approach: We prioritize our clients’ goals and work closely with them to develop customized solutions that align with their business objectives.
Comprehensive Services: From initial consultation to final resolution, we provide full-spectrum legal services designed to address every aspect of your case.
Results-Driven: Our track record of success in litigation and bankruptcy cases speaks to our commitment to achieving the best possible outcomes for our clients.

Rudy Giuliani’s Bankruptcy and the Importance of Transparency in Bankruptcy Disclosure

Bankruptcy Disclosure

Rudy Giuliani’s Bankruptcy Case: A Legal Saga Unfolds

In a recent turn of events, the bankruptcy case of Rudy Giuliani, former New York mayor and lawyer to Donald Trump, is likely to be dismissed following an agreement with his largest creditors. This decision comes after Giuliani expressed his desire to shift from Chapter 11 to Chapter 7 bankruptcy earlier this month, a move that would have placed his finances under the control of an outside trustee. However, just before a scheduled hearing in the U.S. Bankruptcy Court in New York, Giuliani chose to seek dismissal of his case instead. A bankruptcy judge has indicated a likelihood of granting this request, leaving his creditors, including two Georgia election workers who won a $148 million judgment against him, to collect their dues outside of the bankruptcy proceedings.

This case has been fraught with allegations of Giuliani misreporting assets and income, failing to control his spending, and disregarding requests for information. The creditors’ committee, representing those owed by Giuliani, has favored appointing a Chapter 11 trustee to investigate his finances and maximize asset value. They argue that without such measures, the lack of transparency and control will continue to hamper the case.

Living the Nightmare of Debt

Being in debt feels like you’re living someone else’s nightmare. The sun’s dimmer, the phone and mailbox are ominously threatening, and you can feel isolated and lonely even when standing in a crowded room filled with people you know and love. Here’s your reality check: Debt happens to everyone, and using bankruptcy as a way out of the nightmare is more common than you may think.

Still, filing for bankruptcy means you have rules to follow. Bankruptcy isn’t about confessing your financial sins, nor is it as simple as bellowing, “I – DECLARE – BANKRUPTCY” like Michael Scott. The details matter; failing to disclose all necessary information can severely damage your bankruptcy case.

Your Job in Bankruptcy? Transparency

Bankruptcy isn’t just a buzzword for financial distress. It’s a legal process, and like any process, it has rules. As the debtor, your job is one largely based on transparency. When you file for bankruptcy, transparency isn’t just a good policy; it’s the law. The US Bankruptcy Code mandates a debtor to file a list of assets and liabilities, current income and expenditures, and a statement of financial affairs.

Your debts, all assets, including property, and their value should be disclosed. You’re also required to detail your income and expenses and certain transactions involving the transfer of money or property. In short, you have to lay bare every bit of your financial life: the debts, the assets, the income, the expenses. Failure to do so can result in consequences you don’t want to face.

Playing with Fire: Consequences of Incomplete or False Disclosure

Violating the disclosure rules in bankruptcy isn’t like forgetting to take out the trash. It’s serious stuff, like carelessly running a red light and ending up in the emergency room with broken bones. Not fully disclosing or providing false information may result in the dismissal of your case, fines, or in some extreme cases, imprisonment. Yes, you read that right. Bankruptcy fraud is a federal crime.

Moreover, hiding assets might result in losing those assets to the bankruptcy trustee. You could lose a dormant savings account, an anticipated tax refund, accrued vacation pay, or insurance interests if they are not properly disclosed and exempted.

Bankruptcy Rule of Thumb: You’re Not as Smart as You Think

There are no secrets when it comes to bankruptcy. Trustees and judges have seen every trick in the book. Information is readily available. Technology makes it nearly impossible to hide the truth from the federal court system.

To underscore the importance of full disclosure in bankruptcy and the penalties for failing to do so, remember Teresa and Joe Giudice from the Real Housewives of New Jersey. Their bankruptcy tale could easily be a spin-off series, “The Real Convicts of Bankruptcy Fraud.”

In 2009, the Giudices filed for bankruptcy. But rather than being a ticket to financial freedom, it turned into a cautionary tale about the dire consequences of incomplete disclosure. Among the assets they failed to reveal were multiple businesses, various sources of income – including rental income and Teresa’s salary from the reality show – and even the true value of their home furnishings.

By 2014, the couple found themselves pleading guilty to fraud charges. Teresa was sentenced to 15 months in federal prison, while Joe received a 41-month sentence. They were also ordered to pay a hefty amount in restitution – to the tune of $414,588. And, as an extra sting, a significant amount of their debt was not discharged.

The Giudice debacle is a stark reminder of why you can’t play fast and loose with the bankruptcy court system. It also underscores the need for an experienced bankruptcy attorney to guide you in meeting your disclosure requirements and navigating the system.

Understanding the Role of a Bankruptcy Trustee

A bankruptcy trustee oversees a bankruptcy filing and plays a major role in determining if a case goes forward. Trustees are appointed by the bankruptcy judge to look for assets that can be used to pay creditors, which includes an in-depth investigation of your finances if you are the one filing for bankruptcy.

While trustees are neutral parties, their main duty is to make sure creditors get paid as much as possible for what they are owed. The bankruptcy trustee will look for property, income, and assets, as well as whether you are hiding assets. What the trustee specifically looks for depends on whether it’s a Chapter 7 or Chapter 13 bankruptcy, the two most common types of bankruptcy. In both cases, the trustee’s investigation will include comparing the paperwork you filed (legally called “the schedules”) with financial records and other information.

A bankruptcy trustee is experienced in finding red flags that can lead to a dismissal or even fraud charges. If you file for bankruptcy, it makes sense to be honest about your assets and debts and work with the trustee. The success of your case often depends on it.

The Trustee’s Role in Different Types of Bankruptcy

Chapter 7 Bankruptcy

Chapter 7 bankruptcy is often called “liquidation bankruptcy” because, in theory, the assets are liquidated to pay off unsecured debt. In reality, most people who file Chapter 7 keep most of their assets, including their house, car, and other things necessary to live. Nearly 70% of bankruptcies filed by individuals in 2022 were Chapter 7.

“Chapter 7 trustees have the responsibility to look for assets,” Rucinski said. “Pursuant to court order, the assets are sold, and the proceeds are paid to creditors.”

Those filing Chapter 7 must pass a means test, which assesses whether they have the means to pay their unsecured debt (credit cards, medical bills, etc.). If they pass, the non-exempt items are sold and the money raised pays the trustee and covers administrative fees, with the rest going to creditors. The trustee determines what property is exempt and investigates to make sure all non-exempt items and assets are listed.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy involves a 3-5-year payment plan set up by the bankruptcy court. Once the plan is completed (something only about half of those who file Chapter 13 accomplish), the rest of the unsecured debt is discharged. In 2022, 29% of individuals filing for bankruptcy chose Chapter 13. People usually file Chapter 13 because they don’t pass the Chapter 7 means test. The trustee looks for signs of this during the meeting with creditors, which is a big part of the investigation phase of a bankruptcy.

A Chapter 13 trustee:
Determines that the person filing has the income to make payments
Determines creditors are getting the same amount they would if it were a Chapter 7 filing with nonexempt assets
Collects monthly payments from the individual
Pays creditors

Conclusion

Rudy Giuliani’s bankruptcy case serves as a stark reminder of the importance of transparency in bankruptcy disclosures. For debtors, adhering to these rules is not just a matter of legal compliance but a cornerstone of ensuring justice and equity in financial distress situations. Being transparent about your financial situation is crucial, and working closely with a bankruptcy attorney can help ensure you meet all the necessary disclosure requirements. Remember, the details matter, and failing to disclose all necessary information can severely damage your bankruptcy case, just as it did for the Giudices.

Assemblymember Juan Alanis’ Financial Literacy Bill: A Crucial Step Toward Financial Empowerment

Community Empowerment, Financial Education, Legislation and Policy

Empowering Financial Futures: The Importance of Assemblymember Juan Alanis’ Financial Literacy Bill

Financial literacy is more than just a buzzword; it’s the cornerstone of financial stability and success. Understanding how to manage money, budget effectively, and make informed financial decisions can drastically alter the course of one’s life. Unfortunately, many adults struggle with these basic skills, leading to debt, financial instability, and even bankruptcy.

Why Financial Literacy Matters

Financial literacy involves understanding various financial skills and concepts, such as budgeting, managing debt, and investing. Financially literate individuals are generally less vulnerable to financial fraud and better prepared to make decisions that support their financial well-being.

Essential Skills: Knowing how to create a budget, manage debt, and plan for retirement.
Long-Term Benefits: Supports various life goals, such as saving for education or retirement and using debt responsibly.

Did you know? More than two-thirds of adults would fail a basic financial literacy test, and over 47% of American households do not have $400 to cover an emergency.

Assemblymember Juan Alanis’ Financial Literacy Bill

Assemblymember Juan Alanis has made a significant stride toward enhancing financial literacy among California’s youth with the passage of his financial literacy bill, AB 1871. This legislation aims to integrate personal finance education into the social studies curriculum for students in grades 7-12, ensuring that young Californians are equipped with the knowledge and tools they need before graduating high school.

Key Aspects of AB 1871:

Curriculum Integration: Personal finance education becomes part of social studies for grades 7-12.
Early Education: Instills essential financial skills at a young age, preparing students for future financial decisions.

The Financial Literacy Gap

The financial literacy gap starts early in life and is often influenced by socio-economic factors. For example, White and Asian 15-year-olds generally have higher financial literacy scores than their Hispanic and Black peers. Adults of color, particularly in the South, are generally less likely to be financially literate and more likely to experience financial hardship compared to their white peers.

Personal Story: One of our clients, a single mother, struggled with mounting credit card debt due to a lack of understanding of interest rates and budgeting. After declaring bankruptcy, she participated in our financial literacy program and now manages her finances confidently, avoiding past mistakes.

Our Commitment to Financial Literacy

As a bankruptcy law firm, we see firsthand the consequences of financial illiteracy. Many of our clients come to us burdened with debt, lacking the knowledge needed to navigate their financial challenges. Recognizing this, we have developed a program to provide financial literacy training to our clients post-bankruptcy. Our goal is to empower them with the knowledge and tools necessary to make informed financial decisions and avoid future financial pitfalls.

How You Can Improve Your Financial Literacy

Here are several practical strategies to consider:

Create a Budget: Track income and expenses to manage your finances effectively.
Pay Yourself First: Set aside savings before dividing the rest of your expenses.
Get Your Credit Report: Review and dispute any errors to maintain a good credit score.
Manage Debt: Develop a plan to reduce debt by prioritizing high-interest loans.
Invest in Your Future: Contribute to retirement accounts and diversify your investment portfolio.

Do you feel financially literate? Share your thoughts and experiences in the comments below. Do you think financial education in schools is sufficient?

Supporting Assemblymember Juan Alanis’ Efforts

Assemblymember Juan Alanis’ financial literacy bill is a crucial step toward addressing the financial literacy gap in California. By integrating personal finance education into the school curriculum, we can equip young people with the skills they need to manage money effectively and achieve their personal and financial goals.

We applaud Assemblymember Alanis for his dedication to this important issue and look forward to seeing the positive impact of AB 1871 on our community. As we continue to support efforts to improve financial literacy, we are committed to helping our clients build a secure financial future through education and empowerment.

Take Action Today

Educate Yourself: Read books, listen to podcasts, and talk to financial professionals.
Support Legislation: Advocate for financial literacy programs in your local schools.
Join a Program: Enroll in financial literacy courses or workshops to improve your skills.

For more insights on financial literacy and how we support our clients’ financial well-being, visit our blog or contact us at [Your Contact Information]. Together, we can create a financially literate and resilient community.

Sources

For more information on our financial literacy training programs or to schedule a consultation, please contact us today.

Can Bankruptcy Take Your Social Security?

Protecting Assets in Bankruptcy, Social Security

Federal law protects Social Security funds in bankruptcy.

Social Security benefits are “exempt” or protected in bankruptcy, so you can keep your Social Security benefits if you file for bankruptcy, regardless of where you live. However, once commingled with other funds, it can be challenging to prove that the money came from Social Security benefits rather than another source.

The money will lose protected status if you can’t prove your bank account balance is entirely Social Security funds. You can avoid unnecessary problems in bankruptcy by maintaining Social Security benefits in a separate account.

Social Security Benefits Are Exempt Property in Bankruptcy

While your state usually decides what you can and cannot keep in bankruptcy, federal law says all your Social Security funds are exempt property. No matter your state, you’re entitled to keep your Social Security money.

However, you must prove the funds you claim are exempt Social Security funds are indeed exempt, and it isn’t always easy to do. Understanding the bankruptcy process will help emphasize why you must handle Social Security funds properly before filing for bankruptcy.

Listing Social Security Funds and Other Property in Bankruptcy

When filing for bankruptcy, you must list everything you own in your bankruptcy petition without exception. It doesn’t matter whether money is sitting in an account or stashed under your mattress. You must disclose it.

Most people realize they must list big-ticket items, like residential homes, rentals, vacation property, cars, and furniture. But you might be surprised to learn you must include small things, such as the following:

silverware, disches, and linens
hobby and sporting equipment
jewelry and watches,
pets and farm animals, and
small peer-to-peer cosmetic or food storage businesses (even if you have never made a profit).

You can’t forget or hide property in bankruptcy. Everything you own must be disclosed, and it becomes part of your bankruptcy case.

How to Protect Social Security Funds in Bankruptcy

Although you must disclose all property, you don’t lose everything. Each state has exemption laws outlining how much property you can keep when filing for bankruptcy. If an exemption law allows you to keep a particular item, you declare it exempt in your bankruptcy petition by listing the exemption statute’s code number.

Fortunately, most filers can keep necessary household items and a modest car. But there’s no guarantee that everything will remain yours. The Chapter 7 bankruptcy trustee will verify whether you can keep the property and seize nonexempt property for the benefit of your creditors.

Don’t Commingle Social Security Money with Other Funds

When you declare that certain funds are exempt from bankruptcy in your bankruptcy petition, you must prove your right to retain the money. Simply claiming a portion of your bank account balance is exempt Social Security benefits doesn’t mean the bankruptcy trustee will believe you, especially if you’ve mixed or “commingled” them with other funds in the same account. Commingling makes it difficult to prove which funds are exempt.

Keep a Separate Social Security Account

Keeping your Social Security benefits in a separate account exclusively for those funds is a good practice to prevent commingling issues. It allows you to trace the source of the funds to your Social Security check or an automatic deposit from the Social Security Administration.

It’s a good idea even if you aren’t contemplating bankruptcy. It will help protect your Social Security money from creditors’ efforts to collect judgments.

What to Do If You’ve Commingled Funds

If you’ve already commingled your funds, there are a few ways to handle the situation. Here are some strategies you may want to consider:

Before filing for bankruptcy. Consider opening an account solely for your Social Security benefits and exhausting the commingled funds before filing bankruptcy. You’ll want to use the funds to pay for necessities like rent, utilities, and food because these purchases won’t be challenged in bankruptcy. Also, it’s prudent to keep records.
After filing for bankruptcy. Suppose you’ve already filed bankruptcy or cannot wait to exhaust the commingled funds. In that case, you might be able to use another exemption. For example, some states have wildcard exemptions that allow you to protect any property you wish. Others are limited and don’t cover real estate, cash, or bank account funds, so read the statute carefully.

You Might Not Need to File for Bankruptcy If You’re Receiving Social Security

Not only is Social Security income protected from creditors in bankruptcy, but it’s also protected from creditors outside of bankruptcy. So, it’s unusual for someone receiving Social Security income to need to file. It is likely unnecessary if you have little valuable property not covered by exemptions (bankruptcy exemptions apply outside of bankruptcy in almost every state).

Learn whether you’re “judgment proof” and can avoid filing for bankruptcy.

Purchasing and Financing a House After Filing Bankruptcy: The Process for Chapters 7 and 13

After Bankruptcy, Home Buying

Can I buy a house after bankruptcy?

If you had a bankruptcy discharged in the past, you might be thinking about buying a house. The good news is that it’s possible to purchase a home following a Chapter 7 or Chapter 13 bankruptcy. But there’s usually a waiting period of 2-4 years before you can take out a mortgage.

Lenders will look closely at your credit score, credit reports, bankruptcy discharge details, and other factors to ensure you qualify. Tread carefully after bankruptcy and take steps to improve your credit. With hard work and patience, you’ll eventually be able to get a home loan.

Is buying a house after bankruptcy possible?

Yes, you can buy a house after bankruptcy. If you’re not paying cash upfront for a new home, borrowing from a mortgage lender can be challenging. But it’s not impossible. Conventional loan programs and government-backed mortgages have processes in place to help bankruptcy filers recover from their financial missteps and become homeowners again.

Buying a house after Chapter 7

Chapter 7 is the most common type of bankruptcy. When you file for chapter 7, a bankruptcy court wipes out all of your qualifying debts. Chapter 7 filers can expect the bankruptcy to remain on their credit report for 10 years. However, you don’t need to wait a decade before buying a home. Depending on the type of mortgage, many filers only wait 2-4 years to buy a house after Chapter 7 bankruptcy.

Buying a house after Chapter 13

For the most part, it’s easier to buy a home after Chapter 13 bankruptcy than Chapter 7. Rather than all debt being discharged, Chapter 13 bankruptcy puts filers on a 3-5 year debt repayment plan. Afterward, the bankruptcy court discharges any remaining eligible debts. A chapter 13 bankruptcy will remain on your credit reports for seven years.

The amount of time you’ll need to wait before buying a home varies depending on how the court decides to manage your bankruptcy and whether or not it dismisses or discharges your debt. You may even qualify for an FHA, VA, or USDA loan after 12 months. Although, you’ll need to wait at least two years before securing a conventional loan.

How long after Chapter 7 do you have to wait to buy a house?

After a bankruptcy is discharged, it will take time to build your credit and savings back up to home-buying level. Mortgage lenders will want to know your financial situation has fully recovered and that you’ll be able to manage on-time payments with a new mortgage.

As such, lenders enforce a minimum waiting period or “seasoning period” before borrowers can apply for a mortgage after bankruptcy. The minimum waiting periods to get a mortgage after Chapter 7 are as follows:

FHA loans: Two years
VA loans: Two years
USDA loans: Three years
Conventional loans: Four years

These waiting periods are the minimum required by each loan program, and lenders may set stricter guidelines if they choose. For example, some lenders will ask you to wait three years before applying for an FHA loan, rather than the two-year minimum required by the Federal Housing Administration.

Understand that the waiting periods after Chapter 7 bankruptcy don’t start until a bankruptcy court discharges or dismisses your bankruptcy. That’s at the end of the bankruptcy proceedings — typically 4-6 months after you first file.

If you’re counting down the days until you can buy a house after bankruptcy, be sure to start your calendar on the correct date — of the discharge or dismissal — because it will make a big difference in when you hit the two-year mark.

Can I buy a house 1 year after Chapter 7 discharge?

In most cases, there’s at least a two-year waiting period after your Chapter 7 discharge date until you can be approved for a home loan.

“There are some limited circumstances in which you can obtain a loan after one year from the discharge,” explains Andrea Puricelli, production resources engagement manager for Inlanta Mortgage. “But that’s only if the bankruptcy was caused by extenuating circumstances beyond your control, and you’ve since exhibited an ability to manage your financial affairs responsibly.”

“Extenuating circumstances” could apply if you were forced into bankruptcy due to medical bills from a serious illness, or a major job loss or income reduction.

In most cases, though, it takes more than a year to recover after declaring bankruptcy. So most home buyers will have to wait two years or more before buying real estate. Take this time to get your credit score as high as possible and save for a bigger down payment. Both strategies will help you get a lower mortgage rate and a more affordable home loan when you do buy.

Extenuating circumstances

You may be able to skip the long Chapter 7 waiting period if your bankruptcy was caused by an event outside your control. But keep in mind that each loan program has its own guidelines for what life events qualify as “extenuating circumstances.” So it’s important to speak with your bankruptcy attorney to ensure that you have a clear picture of whether or not your financial situation is eligible.

Conventional loans: Fannie Mae defines an extenuating circumstance as any nonrecurring event that causes “a sudden, significant and prolonged reduction in income or a catastrophic increase in financial obligations” This could include job loss, extended unemployment, divorce, or medical expenses from disability or illness. On the other hand, Freddie Mac has a broader definition of “factors clearly beyond the control of the borrower”
FHA loans: Any event that reduced your household income by 20% or more for at least six months is considered an eligible circumstance by the FHA
VA loans: Extenuating circumstances include events such as unemployment or uncovered medical bills. Note that divorce is not permitted under VA rules
USDA loans: Qualifying circumstances are limited to those that were beyond your control and are not likely to happen again. This could include a loss of employment or a reduction or cessation of government-issued benefits

If any of these applies to you, be ready to thoroughly document the event that led to your bankruptcy and show how you’ve solved for it. The lender will want to be sure that nothing similar is going to happen in the future.

Mortgage after bankruptcy: Rules by loan type

If you’ve filed for Chapter 7 or Chapter 13, you’re still eligible for a broad portfolio of home loans. There aren’t any “bankruptcy rules” preventing you from getting a mortgage ever again. You’ll need to observe mandatory waiting periods and meet any loan requirements that are normally in place. In addition, certain loan products will be easier to qualify for than others.

Conventional mortgage: Waiting period of four years, but 3% down payment and 620 minimum credit score. You can usually stop paying mortgage insurance (PMI) once you reach 20% home equity
FHA mortgage: This loan type is likely more attainable for buyers with a Chapter 7 bankruptcy in their credit history. Popular with first-time home buyers, it features 3.5% down payment and 580 credit requirement. But you’re on the hook for mortgage insurance premiums (MIP) for the entire loan term, unless you refinance to a different type of mortgage, move, or pay off your loan
VA mortgage: The Department of Veterans Affairs requires a minimum waiting period of two years from the date of your Chapter 7 discharge. To qualify for a VA home loan, you need to be an eligible veteran, service member, or member of an associated group (including some spouses)
USDA mortgage: The waiting period is three years, with some exceptions based on the bankruptcy filing. This type of loan generally requires a minimum credit score of 640 or higher to buy homes in eligible rural areas

As always, the right loan type for you will depend on your financial situation and the home you’re buying. But for many borrowers with past credit issues, an FHA loan could be the right solution.

FHA loans after Chapter 7 bankruptcy

Fortunately, you can qualify for an FHA loan following Chapter 7. But be prepared to wait a while before you’ll get approved.

“Bankruptcy will not stop you from making a large purchase, like a home, in the future. So yes, it is possible to obtain an FHA home loan after Chapter 7 bankruptcy,” says Jeremiah Heck, a debt and bankruptcy attorney. “Typically, you have to wait for a minimum of two years after your bankruptcy is approved by the courts to be eligible.”

In some cases, the mortgage lender may require additional time. “For instance, some banks tend to ask potential borrowers who filed Chapter 7 bankruptcy to wait a total of three years before they are eligible,” adds Heck.

In addition to the waiting period, you’ll need to meet other FHA loan requirements. These typically include:

Credit requirement of at least 580
Down payment of 3.5% or more
Debt-to-income ratio below 50%
Steady income and employment
Income source expected to continue for three years

Avoiding any new debts after bankruptcy — for example, a car loan or personal loan — can help your chances of qualifying for an FHA mortgage once the two-year waiting period is over.

How to apply for a mortgage after bankruptcy

The mortgage application process is largely the same for Chapter 7 filers as for any other home buyer. But there are a few extra steps you’ll likely want to take before trying to buy a house.

Improve your credit score. We dive into this step in more detail below, but bankruptcy is a blemish on your credit history, and one that you need to address before even considering homeownership. Improving your credit may take time. And, doing so can significantly increase the length of time you’ll need to wait to buy a home

Write a letter of explanation. Writing a letter that explains your bankruptcy gives you an opportunity to address any red flags on your mortgage application. Include details about why you filed for bankruptcy and how your personal finances have improved. Also, explain the steps you’re taking to ensure bankruptcy never happens again

Get mortgage preapproval. Getting preapproved for a mortgage shows sellers and real estate agents that a lender has confirmed your ability to secure a mortgage. It will also reassure you of your home buying eligibility and establish your budget

Keep in mind that a bankruptcy filing stays on your credit reports for 7-10 years. Even after you become mortgage-eligible, your lender may still require legal documentation from the bankruptcy court to verify your status when you apply.

“This doesn’t hinder your ability to buy a home. But it’s realistic to acknowledge that a lender is going to consider that fact when reviewing your loan request,” cautions Heck. “My suggestion is to expect 2-3 years to rebuild your financial health following a bankruptcy.”

How to improve your chances of buying a house after bankruptcy

To get approved for any type of mortgage loan after bankruptcy, you need to demonstrate to lenders that you can manage your finances responsibly and that you will be able to reliably make mortgage payments. “That will require establishing good credit habits and ensuring that you’re not over-utilizing credit,” says Puricelli.

To rebuild bad credit more quickly, follow these tips:

Pay all your bills on time and in full
Check your free credit reports with the three major credit bureaus often and dispute anything inaccurate
Don’t take on unsecured debt, like personal loans or credit cards, which will most likely come with high interest rates
Get a secure line of credit, such as a secured credit card, that is backed with a deposit you pay beforehand

Having a friend or relative cosign on new credit lines can also help you qualify more easily and start building new credit. But this strategy comes with a lot of risk, because the co-signer is agreeing to take over your new debts if you can’t pay them. And if the loan goes bad, their credit will take a hit, too.

Is it hard to buy a house after bankruptcy?

“Getting a loan will be very difficult for a few years immediately following a bankruptcy,” says Reggie Graham, branch manager for Silverton Mortgage. He notes that home buyers applying after Chapter 7 and Chapter 13 bankruptcy can often expect bigger down payment requirements and higher interest rates.

“Your focus should be on rebuilding your credit to prepare for applying for a mortgage loan when you’re ready,” says Graham.

He also suggests the wait time to buy a home may be shorter if you file a Chapter 13 bankruptcy rather than Chapter 7. “Chapter 13 involves paying back an agreed-upon portion of your debt, which lenders look more kindly upon,” Graham explains.

Buying a house after Chapter 7 bankruptcy: FAQ

How soon can I buy a house after Chapter 7 discharge?

Most home buyers have to wait at least 2-4 years after Chapter 7 discharge before they can get approved for a home loan. It may be possible to qualify sooner if you were forced into bankruptcy for reasons beyond your control, but early approval is rare.

What is the average credit score after Chapter 7?

The average credit score after a Chapter 7 bankruptcy is commonly in the low 400s to mid 500s. To qualify for a home loan, you typically need to meet a credit score requirement of 580-620 or higher.

Can you buy a house after Chapter 7 with a co-signer?

Yes, having a co-signer can improve your chances of getting a mortgage post-bankruptcy. But this can be a risky move for the co-signer. So you want to be sure you can make the monthly payments on time if you choose this option. Also, you will likely still need to wait two to four years after bankruptcy to apply for a mortgage loan, even with a co-signer.

Can I get a VA loan one year after Chapter 7?

Usually not. The minimum waiting period to obtain a VA loan after Chapter 7 bankruptcy is two years.

Can I get an FHA loan after Chapter 7?

Yes, provided you rebuild your credit and wait two years after your bankruptcy is approved by the courts. Avoiding new debt after your bankruptcy is discharged can also help your chances of qualifying for an FHA mortgage.

What credit score do I need for an FHA loan?

FHA loans require a minimum credit score of 580.

How much down payment do I need for an FHA loan?

If your credit score is 580 or higher, you may only need a down payment of 3.5 percent. But if you pursue an FHA loan and your score is lower, the down payment required will usually need to be at least 10 percent.

What happens to a second mortgage during bankruptcy?

With Chapter 7 bankruptcy filing, judges often don’t discharge second mortgages. That means the filer is still responsible for repayment and lenders can begin foreclosure proceedings to recoup losses. Chapter 13 bankruptcy filings offer lien stripping, which removes junior liens on the property. Since primary mortgages take priority, debt from your second mortgage may possibly be discharged — after completion of a repayment plan — removing the second mortgage lien. If approved, lien stripping could be beneficial for homes that are underwater.

How do I apply for a mortgage after bankruptcy?

Once your waiting period is over, you’ll likely need to repair your credit by paying down debts and making on-time payments for bills. You’ll then need to write a letter of explanation that provides your lender with more details about your bankruptcy. Afterward, you’ll seek mortgage preapproval just like you would with a new home loan or a refinance.

Check your home buying eligibility

Having a bankruptcy in your credit file shouldn’t stop you from buying or refinancing a home. Typically, home buyers applying after Chapter 7 bankruptcy will be charged higher interest rates. But shopping around could help you get a fair deal on your home loan.

If you’re thinking about homeownership, check with a few mortgage lenders to verify your home loan eligibility and find out what rates you qualify for. If you’ve been doing the hard work of rebuilding your financial life, you may be able to get a mortgage sooner than you think.

How Long Does It Take for a Creditor to Sue Me?

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In the most simple terms, a creditor may file a lawsuit once a default has occurred. That means, if you default on a loan, thereafter the creditor may seek a legal remedy. In reality, it’s a bit more nuanced.

First, consider the statute of limitations in California, which is four (4) years. That means, a creditor has up to four (4) years to file a lawsuit for damages. Not all creditors file lawsuits. In my experience, some of the more aggressive creditors like AmEx or Discover will bring a lawsuit in three (3) to six (6) months.

Also, consider the cost-benefit analysis. Ask yourself, what is the likelihood that a creditor will spend $2,000 to recover $500. That’s not to say that there aren’t a lot of rinky-dink collection lawsuits but perspective matters.

I see lawsuits soon after default and I see lawsuits right before the statute of limitations runs. It’s dependent on the creditor.

If you have question, please make an appointment to discuss your bankruptcy options with Modesto Bankruptcy Lawyer Brian Haddix.