Securing a VA Loan After Consumer Bankruptcy

Many veterans in the Chicago area are all too familiar with the difficulty of earning a living after returning to civilian life. Numerous veterans in Illinois have filed for consumer bankruptcy and have lost their homes to foreclosure. Is it still possible to buy a home after experiencing financial setbacks? According to an article from Military.com, home ownership is not out of reach for America’s veterans who have sought bankruptcy protection. To be sure, veterans who have filed for personal bankruptcy can still count on using their VA home loan benefits.
Veterans Filing for Chapter 7 or Chapter 13 Bankruptcy
Making the decision to file for Chapter 7 or Chapter 13 bankruptcy is often difficult. While bankruptcy protection can be a powerful tool for veterans with insurmountable debt, it can also make it difficult to secure credit in the months afterward. Personal bankruptcy can hurt your credit score, and a low credit score can make it hard to find a mortgage lender. If you have filed for bankruptcy and are hoping to use your VA home loan benefits to purchase a house, it is important to understand the different ways in which Chapter 7 and Chapter 13 are likely to impact your home-buying timeline. In order to think about the effects of each, it is important to know how both forms of bankruptcy work.
Chapter 7 bankruptcy is also known as liquidation bankruptcy. In other words, Chapter 7 allows you to discharge most of your debt (and in many cases, all of your debt) by liquidating assets. Veterans can file for Chapter 7 bankruptcy and can have credit card bills and medical bills erased. It gives consumers a clean slate from which to start over, but starting over has consequences if you are thinking about trying to secure credit for a major purchase.
Chapter 13 bankruptcy allows consumers to restructure their debts by creating a repayment plan. Typically, the repayment plan requires a debtor to make payments over a period of three to five years, after which they are caught up on debts. Under Chapter 13 bankruptcy, there is no liquidation.
Bankruptcy “Seasoning” and VA Loans
Now that we have a clear sense of the difference between Chapter 7 and Chapter 13 bankruptcy, we can talk about the impact of each upon securing a VA home loan. When you seek bankruptcy protection, you will typically see your credit score decline drastically, “anywhere from 130 to 240 points.” What do VA lenders look for when they are deciding whether to approve you for a loan? Usually VA lenders want to see a credit score of at least 620. While you may not have a credit score this high after initially filing for bankruptcy, developing a new history of on-time payments and healthy financial behavior can bring your score back up relatively quickly.
The other issue to keep in mind is the “seasoning” period for a loan. Here is where the difference between Chapter 7 and Chapter 13 bankruptcy becomes particularly important. The “seasoning” period refers to the amount of time you must wait after your bankruptcy filing or discharge in order to obtain a loan. For veterans who have filed for Chapter 7 bankruptcy, you will typically need to wait two years from the date of discharge before being able to secure a VA home loan. For those who have filed for Chapter 13 bankruptcy, you will generally need to wait one year from the date of filing before being able to use your VA home loan benefits.
Applying for loans after bankruptcy can be a confusing process, but an experienced Oak Park bankruptcy attorney can help. If you have questions about how bankruptcy can impact your VA benefits, do not hesitate to seek advice from an advocate at the Emerson Law Firm. Contact us today to learn more about our services.
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