While it is no secret that Connecticut bankruptcies and foreclosures have the potential to damage credit, the extent to which this occurs and the mechanics behind the process remain a mystery to many people, even those considering entering the bankruptcy process. This might lead to unexpected disappointments when pursuing a new mortgage. Understanding the difference between Chapter 13 and foreclosure is the first step in dispelling this mystery.
The Administrative Office of the United States Courts describes Chapter 13 bankruptcy as an alternative to foreclosure. If an individual qualifies for and complies with all the rules of this type of bankruptcy, foreclosure proceedings will stop. This gives those who are able to manage more reasonable terms of liability a way of addressing debts without losing their homes, often via payroll deduction. The process also has the potential to lower payment amounts on certain types of debts.
Chapter 13 bankruptcy might give debtors a chance to save their home, but it does not do any favors for their credit rating. This is, in part, due to the limited number of agencies from which the Federal Housing Finance Authority accepts credit reports. Fox Business explains in their investigation of the subject that a precarious balance exists between allowing more access to mortgages and preserving the relatively low rate of defaults created by stricter credit reporting.
It is unlikely that Federal agencies will loosen restrictions on new mortgages overnight. However, accepting different credit reports might make it easier for prospective borrowers to obtain mortgages, even if they have gone through bankruptcy.