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What Happens After I File Bankruptcy in New Jersey?

December 13, 2017 Scura Law Firm Bankruptcy
Buy-house-after-bankruptyWhen you begin considering filing for bankruptcy, you likely have many questions about the process itself and what will happen after everything is all said and done. Your financial future may look very different after you file bankruptcy. Many of your long-term goals are still attainable after you go through the bankruptcy process—and it may not take as long as you might think. 

Can I Buy a House After I File Bankruptcy?

For many people, one of these long-term goals is owning a home.  Nonetheless, buying a home right after you file for bankruptcy may not be a good idea for a few reasons.

Avoiding “Rebound Buyer” Status

Bankruptcy can cut your debts down to extremely minimal amounts. Bankruptcy lifts the heavy burdens associated with what may have been long-term, unruly debt obligations. For some, however, this new-found freedom may encourage them to make large purchases that could land them back in the bankruptcy court years down the road.

Having fewer debts in total may lead debtors to consider home ownership, whether that is for the first time or because the debtor had to give up their previous house in bankruptcy. However, because bankruptcy, and the events leading up to it, often hit your credit profile hard, buying a home right after bankruptcy is likely not a financially savvy decision, even if it may be feasible.

You may also want some time to save up for a down payment on your potential new home. Saving during bankruptcy can be difficult and even impossible, which means that having the extra time to accumulate a down payment or emergency fund after bankruptcy may be critical.

Homebuying after Chapter 7 and Chapter 13 Bankruptcy

How quickly after bankruptcy you can purchase a home will depend on which type of bankruptcy you file. It will also be contingent on the relative “seasoning period” of the mortgage program or the lender. Different mortgage products have specific requirements about how long after a bankruptcy someone can obtain a particular type of mortgage. Lenders may also have in-house restrictions as well.

The most common types of bankruptcies for individuals are based on Chapter 7 and Chapter 13 of the bankruptcy code. A Chapter 7 bankruptcy is essentially a liquidation. All of your non-exempt assets are inventoried and sold to pay your creditors. The process can take as little as a few months after you file. Once you have your discharge, the “seasoning” period begins. The “wait-time” on a conventional mortgage is often around four years. However, you may be able to obtain a VA loan or FHA loan in as little as two years.

A Chapter 13 bankruptcy involves a repayment plan. Your income will be used to make periodic, usually monthly, payments to your creditors for a specified amount of time. The repayment plans in Chapter 13 will generally take between three and five years. However, you can technically still purchase a new house while you are completing your repayment plan. You must get court permission to start this process, and it can be difficult to obtain a mortgage while you are in bankruptcy. In fact, many lenders will flat out refuse to start a new loan process with someone who is still going through Chapter 13 bankruptcy.

The wait time for Chapter 13 filers is often less than those who file for Chapter 7. However, this likely has a lot to do with the fact that you do not receive your discharge in Chapter 13 until your repayment period is over. Once you receive your discharge, you may be able to obtain a conventional mortgage in as little as two years. FHA and VA loans may have even shorter wait times as well.

None of these wait time estimates are hard and fast rules. You may be able to obtain a mortgage in a much shorter period. Nonetheless, the longer you wait after your bankruptcy, the more likely you are to have access to favorable mortgage rates.

Bankruptcy and Mortgage Rates

It is true that bankruptcy can affect your ability to get a mortgage in the future. Some banks will avoid working with those who have declared bankruptcy within a certain timeframe. Bankruptcy will, in all likelihood, decrease your credit score immediately after you file. However, if you are patient, your credit score will eventually increase so that your mortgage rates will decrease.

You may have heard that bankruptcy will stay on your credit report for up to 10 years. While this information is accurate, the impact that your bankruptcy has on your score will fade over time. In fact, one study indicated that those who filed for bankruptcy actually had higher credit ratings a year after bankruptcy compared to those who were considered insolvent but did not file bankruptcy. In that respect, filing for bankruptcy can increase your ability to obtain favorable mortgage rates.

Getting Ready to Purchase Your Home

While you wait to “recover” financially from your bankruptcy, you can use that time to save, plan, and ensure that your credit report is accurate. Once you have received your discharge from your bankruptcy, creditors are not permitted to leave discharged debts on your credit report. If these discharged debts (or debts that have been repaid through your Chapter 13 repayment plan) still appear on your credit report, you should take steps to have them corrected. You can dispute any errors online with each of the credit reporting agencies—TransUnion, Experian, and Equifax. The process can be time-consuming, so begin far in advance of shopping for your new home.

You may also want to take other steps to attempt to rebuild your credit quickly after a bankruptcy, including considering a secured credit card and arranging for an installment loan. Be sure to also continue to make all of your payments on time and try to use only a small portion of your available credit at one time.

As a rule of thumb, those who file bankruptcy will generally see much more favorable home mortgage rates two years after their discharge. While it may be difficult to wait to purchase a home, it will often save you money in the long run to simply be patient.

Can I Buy a Car After Filing Bankruptcy?

salesman handing car keys to businessmanGetting a loan after filing bankruptcy may be difficult, but it is certainly not impossible. In fact, getting a loan for a purchase like a car may often be easier to obtain than simply asking for a personal loan to help with ongoing expenses.

You can definitely buy a car after bankruptcy, and, in fact, many people may have freed up enough income after their debts are discharged that they can save up for a car faster. They may also be able to afford car payments that may not have been possible based on their pre-bankruptcy debt-load. However, getting a loan will often come with a hefty interest rate, so many people choose to hold off on financing a vehicle for some time after bankruptcy.

Buying a Car with Cash or Credit

You can decide to save up your extra income and get a car when you can purchase it outright or, at least, put down a hefty down payment. You can also choose to finance the entire purchase. One option is not necessarily better than the other, and your unique circumstances may dictate which choice is appropriate for you.

Saving up for a car may be easier after you receive your bankruptcy discharge. However, it can still take a considerable amount of time. Of course, you likely do not have any savings at all after going through bankruptcy, as all of your assets should have been turned over to the trustee. Unfortunately, if you need a car immediately, you may not be able to wait to save up what you need. If you already have a vehicle that you would like to trade in, that may affect how long you need to save as well.

Lenders may actually be eager to give you credit for a car purchase. They know that you will be unable to file bankruptcy again for several years and that the collateral of the car will protect them. As such, giving you vehicle financing after a bankruptcy is actually a relatively safe bet for them. Unfortunately, that does not stop them from charging higher than normal interest rates in many situations.

The Benefits and Drawbacks of Financing a Car Purchase After Bankruptcy

Financing a car purchase after bankruptcy has both pros and cons. Perhaps the most important benefit is obvious—you get a car. For some, the need for a vehicle is so great that financing the purchase is really the only viable option. For those that have the luxury of determining whether to buy a car now or wait until they have more saved, they should weigh the pros and cons carefully.

Financing a vehicle can help you rebuild your credit after filing bankruptcy. You will be purchasing a “big ticket” item on which you must make timely installment payments. Over time, this type of arrangement can dramatically increase your credit score. Of course, financing also allows you to obtain a vehicle faster than waiting to save up for the purchase.

The biggest downside to financing the car is that the lender will likely charge you an extremely high-interest rate—many percentage rates are in the upper twenties. Today, however, bankruptcy does not carry the negative connotations that it did in the past, and lenders are much more likely to work with you after a bankruptcy. It is also important to note that the longer you wait from the date of your bankruptcy, the less impact the bankruptcy is likely to have on your credit. That means that the longer you wait after a bankruptcy to purchase a car, the less your interest rate is likely to be.

Timing of Purchasing a Car on Credit

It is important to wait until after your bankruptcy is fully processed and you have received your discharge to buy a car. Timing will vary depending on whether you filed Chapter 7 or Chapter 13 bankruptcy.

Timing in Chapter 7 bankruptcy is fairly straightforward. You will receive a Notice of Discharge from the clerk of court. Once you receive this Notice, you have received your “fresh start,” and you are free to incur additional debt. You will generally obtain this Notice at least 90 days after your meeting of creditors (or 341 meeting).

In a Chapter 13 bankruptcy, you will be making payments for a significant period of time—often three to five years. As such, obtaining new financing may need to wait until you have completed your repayment plan. If you need to purchase a car while you are still working on your repayment plan, you must get permission from the court to do so. Such an arrangement may also alter how your plan will move forward in the future as well. Your bankruptcy attorney will be able to help you with the court approval process if you need to purchase a vehicle while your bankruptcy is still pending.

If you have already received your discharge in Chapter 13, you can obtain financing for your car as you would like. Keep in mind, however, that the longer you wait, the more likely you are to receive a favorable interest rate.

The Importance of Shopping Around

Financing a car after filing bankruptcy can be expensive. It is even more important to shop around for the best interest rate before you make your final decision on a vehicle after you have filed bankruptcy. The extra effort can end up saving you hundreds and even thousands of dollars over time.

Keep in mind, however, every time that someone does a “hard inquiry” on your credit, that can damage your credit score. As such, you want to be sure to ask ahead of time whether applying for credit will result in a “hard” inquiry. Many times, lenders can give you an idea of what your interest rate will be without taking this more finalized step. Be sure to ask questions and ensure that you understand all of the terms and conditions before making a commitment.

Can I Get Credit After Filing Bankruptcy?

credit cardsThe most common reason that individuals file for bankruptcy is because their debts have become overwhelming. They may have creditors calling them, and they might be unsure how they will make their next monthly payments for necessities.

Because bankruptcy discharges most, if not all, of your debts, you may feel refreshed after bankruptcy—like a weight has been lifted off your shoulders. While this can be a great feeling, it does come with some longer-term repercussions.

Your credit score will likely take a hit after you file for bankruptcy. However, many people wait to file until after their credit score has already been affected by late payments, non-payments, and debts that have gone into collections. For many, bankruptcy is actually the first step to putting your credit back together.

Getting credit after bankruptcy is not only possible, but it is also relatively easy to obtain. However, your credit offers may not be very appealing right away. You have to make some smart decisions to start rebuilding your credit score after bankruptcy so you can obtain more favorable credit terms.

How Bankruptcy Affects Your Credit

Having a bankruptcy on your credit report does not look good. However, bankruptcy may not have as negative an effect as you may assume. In fact, those who file bankruptcy often have a better credit score after filing over time than those who have similar debts but do not file bankruptcy. The difference is that the late payment and non-payments continue to hurt your credit if you choose not to file bankruptcy. Those credit “dings” stop when you file bankruptcy.

A bankruptcy will stay on your credit report for up to ten years. It also often drops your credit score between 160 to 220 points. That kind of drop will alter a “fair” score down to a “poor” score. If your score is already weak, filing bankruptcy will not have as much of an effect compared to if you had a good score before the bankruptcy process.

How much debt you discharge will often also have an effect on your credit score. Bankruptcy will not affect everyone’s credit score the same; it will depend on how much you are discharging, how many accounts you may have, and what type of bankruptcy you file.

Smart Credit Choices: Choosing Chapter 7 or Chapter 13

The type of bankruptcy you file may affect whether you can get credit after bankruptcy. According to FICO, the most well-known credit scoring business in the United States, whether you file Chapter 7 or Chapter 13 will not make a difference in terms of how the bankruptcy affects your credit score. However, some creditors may look more favorably on Chapter 13 filings when considering whether to grant you additional credit after bankruptcy. This is simply because creditors usually receive a higher repayment in Chapter 13 cases.

A Chapter 7 bankruptcy will stay on your credit report for ten years. However, the debts that you discharge will fall off your credit report in about seven years. If you file Chapter 13 bankruptcy, the process itself takes longer, and the bankruptcy will usually come off your credit report seven years after the Chapter 13 plan is completed and your debts have been discharged.

Getting Credit After Bankruptcy

Many people assume that you cannot get credit after you file bankruptcy. Thankfully, however, this common myth is not true. Many potential creditors, particularly credit card companies, will try to tell you that the only way you can get credit is to pay very high rates with meager limits. In fact, you may be surprised at how many credit card offers you receive after your bankruptcy is finalized.

While your credit offers are not going to be as good after bankruptcy as they may have been before bankruptcy, you are going to have credit options. Once you have your bankruptcy discharge, you cannot file bankruptcy again for eight years. That actually means that you a relatively safe investment for those offering credit. You are also attractive for another reason—you have little to no debt after bankruptcy. For many, that means that your debt to income ratio looks much, much better after bankruptcy.

Increasing Your Credit Score After Bankruptcy

The only way you will improve your credit offers is to enhance your credit score after bankruptcy. Unfortunately, the only way you can do that in many situations is to take some credit offers. Over time, your offers for credit will get better, but this can take several years. If you do not want to wait that long, there are a few things that you can do to help increase your credit score after bankruptcy.

Always, always make payments on time.

If you kept a house, car, or another asset in the bankruptcy, be sure to continue to make your regular payments on time. Over time, making these monthly payments will increase your credit score. Failing to make these payments will harm your credit, which can completely undermine all of your other efforts to repair your credit.

When incurring additional debt, do not bite off more than you can chew.

It will be tempting to incur debt immediately after bankruptcy because you no longer have the debts you have held for years. Do not take on more than you can handle, especially right after bankruptcy. Take a close look at your income and take extra care to live within your means.

Consider investing in a secured credit card.

Instead of getting a traditional credit card, you may want to consider using a secured credit card roughly six months after bankruptcy. The fees and interest on secured cards will often be lower than what you can get on a traditional credit card right out of bankruptcy. Using the secured card and paying it off monthly can help you establish credit faster. Roughly one year after your bankruptcy discharge, you will likely start receiving better offers on unsecured credit cards.

Do your research and do not over-apply for credit.

Take your time deciding which credit offers to use. Shop for the best rates and low fees and then take advantage of your best option. Do not apply for several credit cards; every application is a hard inquiry, which can damage your credit score.

Consider getting a new car loan.

Car loans are often easier to get compared to credit cards or personal loans. You may want to consider saving up for a down payment after bankruptcy and making a vehicle purchase.

When Will Debt Collectors Quit Harassing Me?

Several federal laws are in place to protect consumers against debt collectors. However, many debt collectors push the bounds of the law in attempting to collect past due accounts. Even if they operate within the confines set out in legislation like the Fair Debt Collection Practices Act, they can be incredibly intimidating and downright annoying. For many, it does border on harassment.

Some creditors even operate in a way that is in violation of federal laws. They assume that you will not do anything about it, so they continue their harassing practices.

Once you file bankruptcy, however, things change drastically. In fact, many people file bankruptcy when they simply cannot take the phone calls and threatening correspondence from debt collectors any longer.

Bankruptcy and the Automatic Stay

One of the major benefits of filing bankruptcy is that it generally forces your creditors to work with you to resolve your debts. It does this by ensuring that the only way a creditor can collect a debt is by going through the bankruptcy system.

The “automatic stay” goes into effect the moment that your bankruptcy petition is filed with the court. It essentially pauses everything related to your debts, including:

  • Foreclosures
  • Court proceedings
  • Sheriff’s sales
  • Harassing phone calls
  • Debt collection correspondence
  • Wage garnishment
  • Most eviction proceedings

Utility companies may not even be able to turn off your utilities after you file bankruptcy. Any action that a creditor can take to collect a debt must stop as soon as you file for bankruptcy.

The stay remains in effect for your entire bankruptcy proceeding. That means that it only stops once your debts are discharged, or your case is resolved in some other way, such as dismissal.

Once you obtain your discharge, the creditors often no longer have legally valid debts. There is no reason for a creditor to attempt to collect because the debt does not exist anymore.

Benefits of the Automatic Stay

The automatic stay is a huge benefit for debtors because they can stop the harassing phone calls and focus on their liquidation or reorganization. However, it is also a benefit for creditors as well. Once the creditors are all forced to use the bankruptcy system, they know they will be treated fairly based on bankruptcy law. There is no race to garnish your wages or seize your assets; the bankruptcy court’s rules determine who gets what in an orderly fashion.

Violating the Automatic Stay

There are situations where creditors either deliberately or unknowingly violate the automatic stay by continuing to attempt to collect. These creditors are breaking bankruptcy law when they engage in this type of action. The bankruptcy court can force them to stop their actions, but you may need to bring it to the Court’s attention. You can handle continued collection efforts by doing a few things.

  1. Tell Your Attorney About the Collection Efforts

Speak with your bankruptcy attorney about the creditor. Describe what the creditor is doing in detail and note the date of the action. Your attorney will be able to take steps on your behalf to get the creditor to stop.

In many situations, creditors continue collection efforts because they are unaware that you have filed bankruptcy. While a notice should go out to your creditors when you file, an error or oversight may prevent the notification from reaching a creditor.

Your attorney will likely respond to the creditor by first sharing the notice of bankruptcy filing with that creditor. In most cases, the creditor will stop its collection efforts once it realizes you have filed bankruptcy.

  1. Telling the Court About the Collection Efforts

If a creditor does not stop harassing you even after receiving notice of your bankruptcy filing, you can let the court know about the collection efforts. The court will determine whether the violation was “willful.” If so, it can sanction the collector for its actions.

The intent to violate the automatic stay is not relevant—only the intent to continue collecting even when it knew of the court’s order and ignored it or failed to act to prevent the action. In situations where a creditor is garnishing wages, the creditor must take affirmative steps to stop the garnishment. If the creditor does not do this, even if they are not contacting you or doing anything extra to collect, then that creditor can still be in violation of the automatic stay.

  1. Other Legal Options

You may also have another type of claim outside of bankruptcy law against a creditor who violates the automatic stay. These claims are asserted in a separate lawsuit that may or may not be addressed in your bankruptcy case. Potential legal claims may fall under:

  • The Fair Credit Reporting Act
  • The Federal Debt Collection Practices Act
  • The New Jersey Fair Debt Collection Practices Act

Your attorney will be able to explore these options with you.

Sanctions for Violating the Automatic Stay

The court is generally permitted to impose fines and sometimes make the creditor pay your attorney’s fees related to the automatic stay violation. You may even be entitled to damages for breach of the automatic stay, particularly if their collection efforts negatively affected you in some other way.

For example, if a creditor’s garnishment forced you to go without paying your electric bill and your electricity is shut off, the creditor may have to pay the fee to get your power turned back on. Punitive damages, those damages that are designed to punish and deter the wrongdoer, may also be available in certain egregious cases.

Limitations of the Automatic Stay

While the automatic stay is designed to be extremely broad, there are some actions that it does not address. Public policy dictates that some items are so important that bankruptcy cannot affect them. For example, certain criminal proceedings will not be stayed if you file bankruptcy. Some child support actions will also continue. Some eviction proceedings may not be affected as well.

Your attorney will be able to tell which proceedings may not be affected by your bankruptcy. However, these are few and far between.

Getting Help from a Bankruptcy Attorney

A bankruptcy attorney can not only help you file bankruptcy, but he or she can provide additional useful information about the best way to go about purchasing a home after bankruptcy. Schedule a free initial consultation with a member of our team by calling (973) 870-0434.

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Whether you need to completely eliminate your debt through Chapter 7 bankruptcy, or need to reorganize your credit payments through Chapter 13 or Chapter 11, we are well qualified as a full-service bankruptcy law firm for people in these and other New Jersey counties: Passaic County, Hudson County, Essex County, Bergen County, Morris County, and Sussex County. Call us today at 973-870-0434 or toll free 888-412-5091.

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