Do Lenders View Chapter 13 Bankruptcy More Favorably Than Foreclosure?

November 8, 2013

Do lenders view Chapter13 Bankruptcy more favorably than foreclosure? For the answer, we can look at the underwriting standards of Fannie Mae or Freddie Mac backed mortgage loans.  If you file for Bankruptcy, you only need to wait Four (4) year after Bankruptcy to qualify for a Fannie Mae or Freddie Mac mortgage. But if you lost your home to foreclosure, you may need to wait up to Seven (7) years after the foreclosure to qualify for these government backed mortgages.

 

This is understandable, because one of the reasons that many mortgage lenders favor debtors who filed for Chapter 13 Bankruptcy over those who allowed their property to go into foreclosure is because repaying a mortgage in Bankruptcy shows that you have every intention of repaying your debt.  Additionally, a Chapter 13 Bankruptcy filing shows that you were willing to face the reality of your financial situation and made secured debt, such as your mortgage, a priority.  In Chapter 13 Bankruptcy unsecured debt (debts that are promises to repay, such as credit cards, personal loans, etc.) can often be partially or fully eliminated allowing a debtor to avoid foreclosure and commit more of their financial resources to repaying a mortgage.

 

While it may not be possible for every debtor to remain in their home through Bankruptcy, filing bankruptcy can offer many other options. For example, a debtor who files for Bankruptcy may be able to convince the lender to allow them to sell the property in a short sale or return the property in what’s called a deed-in-lieu of foreclosure. Whichever process the debtor chooses it will be more manageable for both themselves and their creditors in Bankruptcy.

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