By definition Chapter 7 bankruptcy is a liquidation proceeding in which a debtor’s non-exempt assets, if any, are sold by the Chapter 7 trustee and the proceeds are distributed to creditors according to the priorities established in the Bankruptcy Code.
A Chapter 7 bankruptcy does not disqualify a borrower from obtaining a FHA mortgage if at least two years have elapsed since the discharge date of the bankruptcy. Moreover, the borrower must have re-established good credit or chosen not to incur new debt obligations. The borrower must also have demonstrated a documented ability to responsibly manage his/her financial affairs.
The lender must verify that the borrower’s current situation indicates that the events that led to the bankruptcy are not likely to recur.
Chapter 13 bankruptcy, also called a wage earner’s plan, enables individuals with regular income to develop a plan to repay all or part of their debts. Under this chapter, debtors propose a repayment plan to make installments to creditors over three to five years.
A Chapter 13 bankruptcy does not disqualify a borrower from obtaining an FHA mortgage provided the lender documents one year of the payout period under the bankruptcy has elapsed and the borrower’s payment performance (all required payments made on time) has been satisfactory. Additionally, the borrower must receive permission from the court to enter into a mortgage transaction.