Many millennials in their late 20s and 30s yearn to buy a home, but credit card and student loan debt makes it difficult. While some financial experts shame the younger generation for spending too much money on avocado toast and gourmet coffees, the fact is millennials earn significantly less money than other generations at that stage of life. They also went to college during an era of high college costs and intense pressure to earn a degree in order to find employment. According to an article by rismedia.com, many young people need clarifications when it comes to Chapter 7 bankruptcy filings versus Chapter 13. They also need financial guidance when hoping to afford a home. A National Association of Realtors survey showed 83 percent of millennials put off buying a home by an average of seven years because of student loan debt. While Chapter 7 bankruptcy is a last resort for consumers, new bankruptcy attitudes toward student loan debt could change the future for many millennials with home-buying challenges.
Freeing up a debt-to-income ratio
Having too much debt compared to income makes it virtually impossible to qualify for a home mortgage. Experts point out that, in 2005, Congress added a condition to the bankruptcy rules that allowed student loan borrowers to discharge their loans due to undue hardships. This year, the U.S. Department of Education plans to clarify what constitutes as an undue hardship. Some financial experts believe relieving millennials of student loan debt will ultimately benefit the economy as they buy home and boost the housing market. While not all graduates would walk away from their student loan obligations, some could wipe the slate clean to have a chance for financial freedom down the road.
Waiting for the home ownership dream
Whether a millennial pays off students loans or files Chapter 7 bankruptcy, it will likely delay home ownership. Once a young person pays off his or her loans, it immediately helps their debt-to-income ratio. At the same time, filing bankruptcy also delays the home-buying process because most lenders wait for some time to pass before extending a loan to a person who filed bankruptcy. Depending on the lender, it could take several years to a decade of good credit. As a general rule, people who file for bankruptcy wait at least two years before seeking a home loan. Most lenders are more understanding of Chapter 13 filings, which involve paying back some of the debt. In order to qualify for a mortgage, it's ideal for young people to pay off car loans and all high-interest credit cards. Taking a personal finance class often helps.
Understanding the different filing options
As far as understanding the different kinds of bankruptcy filings, the options include Chapter 7 and Chapter 13. With Chapter 7, millennials get a blank slate to start over with all of their assets liquidated to pay off debt. With Chapter 13, the court approves a repayment play as part of a debt restructuring plan. Chapter 13 filers have to have a steady income. Also, the millennials must have less than about $390,000 in unsecured debt and less than a little over a million in secured debt.
Fortunately, millennials who dream of buying a home despite massive student loan and credit card debt can enjoy FHA and VA loans that are less stringent. For people who declare bankruptcy, the mortgage loan programs often help with low credit scores and lower down payments. At the Law Offices of James C. Shields, we provide legal services for millennials interested in filing for Chapter 7 bankruptcy. For advice on dealing with debt while becoming a homeowner, please contact us.