Latest news with #personal finance
Yahoo
2 days ago
- Business
- Yahoo
How bankruptcy affects your mortgage
Key takeaways If you file for Chapter 7 bankruptcy, you may be able to keep your home, especially if you have a relatively low amount of equity. If you file for Chapter 13 bankruptcy, you're more likely to keep your home, provided you can make any missed payments along with your current ones. Immediately after bankruptcy, home loans are off the table, but you may be able to get a new mortgage within a few years. Shop Top Mortgage Rates Your Path to Homeownership A quicker path to financial freedom Personalized rates in minutes Bankruptcy proceedings can give you some much-needed breathing room, but they also come with serious financial ramifications — including, potentially, for your home. Exactly what happens to your mortgage if you file for bankruptcy, though, varies based on a few factors. 'What happens depends on whether your payments are current, the type of bankruptcy and whether your property has legal protection from creditors,' says Laura Adams, personal finance expert and host of the Money Girl podcast. What is bankruptcy? Bankruptcy is a legal proceeding that a person or entity can initiate if they're unable to repay their debts. There are a handful of different types, and they each treat the outstanding debt differently. Individuals most commonly file for Chapter 7 or Chapter 13 bankruptcy. Type of bankruptcy What it means for you Chapter 7 Often referred to as liquidation, this type of bankruptcy means selling off your non-exempt assets to repay your debt. A trustee oversees this sale. Any remaining unsecured debt (debt not backed by collateral) gets discharged, meaning you're no longer legally obligated to repay it. Chapter 13 Also called reorganization, these bankruptcy proceedings set up a repayment plan for your debts. This plan needs to get approved by the court and gives you 3–5 years to repay. How does Chapter 7 bankruptcy affect my mortgage? When you file for Chapter 7 bankruptcy, you'll sell some of your assets to satisfy your debt. This may include your house — but not always. In the short term, filing for Chapter 7 may actually help you stay in your home, says Bryan Bowmer, broker and owner of Future First Lending, based in Tustin, California. He notes that a bankruptcy filing can trigger an automatic stay, which temporarily prevents creditors from taking collections actions against you — including foreclosing on your home. Longer term, your ability to remain in your home depends on your state's laws, among other factors. It is certainly possible to lose your house in Chapter 7 bankruptcy. 'If your mortgaged property isn't excluded from a Chapter 7 bankruptcy, a lender with a lien can force its sale,' Adams says. Filing Chapter 7 doesn't typically wipe out your mortgage debt, which is secured by your house. If you don't feel as though you can continue to pay your mortgage, you may surrender your home to the lender, which absolves you of further mortgage obligations. Or, if you'd prefer to keep your home, and your lender agrees to it, you may pursue reaffirmation. With this option, you'd continue to make payments on your mortgage according to the original terms, as if you hadn't filed for bankruptcy. However, all of this assumes that your home isn't exempt from Chapter 7 bankruptcy. Learn more: Buying a home after foreclosure When is your house exempt from Chapter 7 bankruptcy? Exemptions are generally based on the amount of equity you have in your home, and the limits — expressed as a dollar amount — vary by state. Usually, if your equity amount is lower than the exemption limit, you can keep your home. If you have more equity than the exemption, you might be forced to sell. In that case, you can work with your trustee and your lender to see if reaffirmation is an option. Some states also have unlimited exemption amounts. 'For instance, in Florida, homestead rights protect your primary residence from creditors if you've lived there several years and the property doesn't exceed a size limit,' Adams says. In bankruptcy law, this concept is called the homestead exemption. It's generally predicated on the assumption that you own the house, and it's your primary residence. You also need to have lived there for a minimum amount of time — usually, at least two years. How does Chapter 13 bankruptcy affect my mortgage? It's a lot easier to keep your home in Chapter 13 bankruptcy. In this scenario, you make a plan to repay your debt over three to five years. Because you're not trying to wipe out your debt, there's no risk of the house getting sold to repay your creditors. 'For mortgages, this provides an opportunity to catch up on missed payments while maintaining current payments,' Bowmer says. 'However, borrowers must demonstrate steady income and commitment to the repayment schedule to keep their home.' If you can't afford both your monthly mortgage obligation and your Chapter 13 payments, your lender may still foreclose. Can you get a mortgage while in bankruptcy? While it's possible to get a mortgage while you're in bankruptcy, there are restrictions, says Esther Phillips, SVP managing director of sales at Key Mortgage. For this to happen, 'you must be utilizing an FHA or a VA mortgage, and it must be a chapter 13 bankruptcy, not a chapter 7,' she says. To qualify, you'll need to have made at least 12 months' worth of bankruptcy repayments, and the court will need to approve your new mortgage debt. Also, the loan may need to be 'underwritten to more conservative standards (versus utilizing automated underwriting, which can have broader criteria for loan approval),' Phillips adds. No matter which type of bankruptcy you've declared, you won't be able to get a conventional loan while you're still in bankruptcy. 'Fannie Mae and Freddie Mac require the bankruptcy to be discharged — regardless of type,' says Phillips. Can you get a mortgage after bankruptcy? 'You can get a mortgage after bankruptcy,' Adams says. 'However, there's typically a two- to four-year waiting period, depending on your bankruptcy type, financial situation and the mortgage you want.' Government-backed loans, like FHA loans and VA loans, are a bit more lenient, typically allowing applicants who've been discharged from Chapter 7 at least two years prior. FHA loans will also accept applicants who are at least one year into a Chapter 13 repayment plan, provided they have court approval. Conventional loans typically require borrowers to wait four years after a Chapter 7 discharge or dismissal to apply for a new mortgage. If you've filed for Chapter 13, you can apply two years after a discharge or four years after dismissal. In short, after bankruptcy, home loans are off the table for a season. You don't have to sit idly by, though. Bowmer recommends using the time to rebuild your credit, focusing on making on-time payments. He also suggests saving for a down payment, if you can, and keeping your debt-to-income ratio as low as possible. Learn more: Buying a house after bankruptcy FAQs Do I have to pay my mortgage if I file for bankruptcy? You're still responsible for that amount of debt, yes. In some cases, bankruptcy will mean your house gets sold to repay your debts, which would eliminate your mortgage and its payment requirements. But it also means losing your home. If you want to stay in the house, you need to be prepared to continue making mortgage payments — and catch up on any payments you've missed. Should I sell my home when filing for bankruptcy? That depends on the laws in your state, your outstanding debt, how much equity you have in your house and other factors. It's best practice to consult with a bankruptcy attorney before making any big decisions like this. How does bankruptcy affect your creditworthiness? Bankruptcy means a serious dip in your credit score (think: a three-digit drop). What's more, it can stay on your credit report for up to a decade. If you want to try to get a mortgage after filing for bankruptcy, it's important to diligently work on improving your credit score.
Forbes
2 days ago
- Business
- Forbes
Good Vs Bad Debt: When To Borrow, Pass, Or Pay Cash
Figuring out when to take out a loan, pay cash, use leverage, or pass when something isn't ... More affordable. Unpacking good vs bad debt. Myth: you should always pay cash if you can. Fact: investors should strive to have multiple tools in their financial toolbox, including taking on debt, using leverage, paying cash, or knowing when to pass when something isn't affordable or just doesn't make sense financially. Yet, it can be difficult to figure out when to use one over the other. Other common challenges include overcoming the mental hurdle of taking on debt even when it's advantageous and respecting potential gaps between what someone is willing to lend and what you can truly afford to borrow. Remember: all debt is bad debt if you can't afford it. Typical Examples Of Good Debt Vs. Bad Debt It is worth noting that the definition of good versus bad debt isn't exact. As with anything in personal finance, here too the answer is 'it depends'. For example, at face value, taking out a mortgage to build equity in a home or using student loans to advance your education and increase your earning potential are positive financial steps. But as illustrated in 2008, there are risks to consider before buying a home with an adjustable-rate mortgage (ARM). And although investing in education has the potential to pay off, it isn't always worth it, so consider the economic value of the chosen major, salary ranges and financial trajectories given likely career paths. Borrowing: Considerations For Debt Here are some of the initial factors you'll need to consider when determining whether it's advantageous to take out a loan. Mortgages Getting a mortgage can provide tax benefits for taxpayers who itemize their deductions. Generally, when buying a primary or second home, interest on loans up to $750,000 can be deducted. This includes home equity lines of credit (HELOCs) if the proceeds are used to buy, build, or substantially improve the residence. Given the increase in the standard deduction, made permanent in The "One Big Beautiful Bill Act" (OBBB), and changes to state and local tax (SALT) deduction caps through 2029, you'll want to run the mortgage interest math. For some, it will be essential for itemizing, for others, it still won't meet the hurdle. If you don't have the cash on hand to purchase the property outright, the primary issue is affordability. In addition to the debt consideration list above, consider the extent to which the purchase will reduce your financial flexibility and ability to manage unexpected costs or events. Remember, lenders typically calculate how much you can 'afford' to borrow using minimum payment requirements. This often isn't truly representative of your financial obligations or prudent measures you're already taking, like paying off credit cards in full each month. If you are able to buy a home with cash instead of a mortgage, consider the opportunity cost. When interest rates are low, it can be a missed investment opportunity if you think your portfolio would produce greater returns than the interest rate on the loan. When rates are higher, it may make more sense to buy with cash, and leave the door open to doing a cash-out refinance if rates drop. If an investor's cost of borrowing is less than their expected rate of return, that's an opportunity for leverage. Student Loans The truth is, college is expensive. As a purely financial decision, the investment doesn't always make sense. Parents are encouraged to help their kids with this important exercise to avoid taking on loan debt that cannot easily be repaid. From a debt perspective, pre-planning is essential. The rules around student loans are complex, and many students will have different structures. This can include multiple tranches of loans (to align with each academic year), subsidized and unsubsidized loans, family loans or parent PLUS loans, federal and private loans, or other borrowing arrangements. This can make it difficult for students to grasp what they'll owe after graduation. Ideally, students can keep borrowing costs low by working part-time, comparing the total cost of one school versus another, and spending the time investigating and applying for merit scholarships. If you do take on debt or if you're considering consolidating or refinancing, understand the differences between federal and private student loans, such as forbearance, income-based payment options, and forgiveness. As with any financial decision, the best choice is an informed one. From a tax standpoint, the student loan interest deduction isn't much of a game-changer. The maximum amount of interest that can be deducted annually is $2,500 (for single or married taxpayers filing jointly). The deduction begins to phase out for single filers when their income exceeds $85,000 or $170,000 for married filers in 2025. Auto Loans Car loans are getting a lot of attention these days thanks to the OBBB. Under the new tax law, individual taxpayers may be eligible to deduct up to $10,000 per year in interest paid on auto loans for personal-use vehicles. There are rules and requirements to be aware of though, including income limits, which disallow single taxpayers earning more than $100,000 annually ($200,000 for couples). This new interest deduction is a perfect example to illustrate the difference between 'can' and 'should'. Let's look at the math: According to NerdWallet, the average interest rate for new car buyers with Prime credit scores (661-780) is currently 6.70%. Assuming a five-year loan, a borrower would need to spend more than $160,000 on a new car to maximize their interest deduction in the first year of the loan. Given the income limits to qualify for the tax break, this would never make financial sense. Car loans are often considered a grey area as far as good versus bad debt is concerned. Consider overall affordability, whether there's a need to build credit, and what other options you have. Cars are means of transportation, not investments. Buyers should remember they can get upside down on their car loan, which can be particularly painful after an accident or serious mechanical issue. Credit Cards And Buy Now Pay Later When used responsibly, credit cards have little downside: earn rewards or cash back for purchases, 30-day interest-free loan when paid off monthly, help settling disputes with vendors, opportunity to build credit, and other services. Credit cards are also an excellent way to safeguard your finances, due to the enhanced fraud protections. This fact alone typically makes using a credit card a better option versus paying with cash using a debit card. However, spenders often get into trouble quickly when they can't pay off their balance every month. With average interest rates around 25%, it is easy to get into a deep hole. This is when credit cards go from good debt to bad debt. Buy now, pay later (BNPL) programs are a relatively new way to pay. Some programs offer no interest installment payments and flexible payment plans. This can help with timing issues (like waiting for a bonus check for example). BNPL programs might not check your credit, which can be a plus as hard inquiries impact your credit score. However, these installment payments can make it difficult to track what you owe and can lead to overspending. Starting fall 2025, FICO scores will include data from buy now, pay later loans. This will help some borrowers build their credit, and hurt those who overextend. There are no tax benefits for interest paid on either payment method. As with any form of debt financing, just because someone is willing to lend it to you, doesn't mean you can afford it. Using credit cards or BNPL programs can be a good way to optimize payments versus cash, but neither should be considered a substitute for having the cash today. So typically, if you don't have the cash in your bank, you should consider passing on the purchase altogether. Borrowing Against Your Portfolio A securities-backed line of credit is like a home equity line of credit in many ways, except the collateral is your investment account, not a home. A securities-backed line of credit (SBLOC) allows investors to get cash by borrowing against their brokerage account instead of liquidating their portfolio to raise cash. It's a great example of using leverage, too. Although it likely is not a good long-term strategy for most investors, it can be a compelling short-term solution while awaiting liquidity from other sources, such as the planned sale of a business. It can also be a top choice for homeowners looking to buy a new home before selling their old one. The main benefits of using a portfolio-based loan are: avoiding capital gains tax from the sale of investments and because there isn't a sale, the account stays fully invested. This helps borrowers avoid the opportunity cost of using cash or investment assets. These types of loans typically avoid the usual fees of a mortgage or other type of secured loan. The interest you pay on the loan may also be tax-deductible depending on what the proceeds are used for. Investors may also have more flexible repayment options. But borrowing against your portfolio carries risks. The lender may be able to demand payment at any time depending on the value of your account or other factors. If you own highly volatile assets, it will increase your risk and impact eligibility. Again, in most cases, borrowing against an investment account should be considered as an optimization strategy or near-term solution for cash-timing issues, not a substitute for affordability issues. Borrow, Pass Or Pay Cash To summarize: if a purchase is going to put undue pressure on your financial situation or is otherwise out of reach financially, consider passing. That doesn't mean not buying anything, though, but reconsidering the budgetary limits. When considering taking on debt versus paying cash, look at all the factors, like the cost of the loan, possible tax benefits, and opportunity cost for cash purchases. This article is a refreshed version of my 2019 article on Good Debt vs. Bad Debt.
Yahoo
3 days ago
- Business
- Yahoo
Ready to retire in 5 years? Here's your checklist
Many of the best investing moves are made on autopilot. Just look at the track record of automatic payroll deductions and savings increases. Other investing decisions, like a transition into retirement, require a more hands-on approach. Christine Benz, Morningstar's director of personal finance and retirement planning, recommends taking a preemptive approach as you get closer to retirement. The key is to visualize what you want your retirement to look like while you have enough time to make any adjustments you might need to get you there. Here are five steps to take now if you plan to retire in the next five years: 1. Consider the role of work in retirement Decide whether some kind of work is realistically part of your retirement plan. That income stream can make your retirement spending simpler, but it shouldn't be the linchpin of your whole plan. That's because you may not be able to work even if you want to. 2. Track your expenses Understand what you're actually spending today and see whether your spending will change over the next few years and into retirement. Getting a grasp of your future spending needs will help you determine whether your plan is on track. 3. Check up on Social Security For most people, Social Security is a key source of income in retirement. Create an account on the Social Security website and make sure they have your correct information. This will let you model out different Social Security claiming dates using your own information. 4. Assess your current retirement savings Look at your spending and subtract Social Security to get a sense of what you'll need from your portfolio. If your spending doesn't align with roughly 4% or less of your portfolio, you may need to make some changes. Consider saving more, investing differently, putting off your planned retirement date, or adjusting how much you plan to spend in retirement. 5. Derisk your portfolio As you get within 10 years of retirement, you'll want to make sure that your asset allocation can help protect your retirement plan from getting derailed by market volatility. If equity losses happen early on in your retirement, you can spend from your safer assets and wait until the market recovers to pull from your stock portfolio. By thinking about retirement preemptively, you'll have a better sense of when you want to retire and what you want it to be like. Plus, you can make any course corrections needed to make it happen. ___ This article was provided to The Associated Press by Morningstar. For more personal finance content, go to Margaret Giles is a senior editor of content development for Morningstar.
Yahoo
3 days ago
- Business
- Yahoo
Ready to retire in 5 years? Here's your checklist
Many of the best investing moves are made on autopilot. Just look at the track record of automatic payroll deductions and savings increases. Other investing decisions, like a transition into retirement, require a more hands-on approach. Christine Benz, Morningstar's director of personal finance and retirement planning, recommends taking a preemptive approach as you get closer to retirement. The key is to visualize what you want your retirement to look like while you have enough time to make any adjustments you might need to get you there. Here are five steps to take now if you plan to retire in the next five years: 1. Consider the role of work in retirement Decide whether some kind of work is realistically part of your retirement plan. That income stream can make your retirement spending simpler, but it shouldn't be the linchpin of your whole plan. That's because you may not be able to work even if you want to. 2. Track your expenses Understand what you're actually spending today and see whether your spending will change over the next few years and into retirement. Getting a grasp of your future spending needs will help you determine whether your plan is on track. 3. Check up on Social Security For most people, Social Security is a key source of income in retirement. Create an account on the Social Security website and make sure they have your correct information. This will let you model out different Social Security claiming dates using your own information. 4. Assess your current retirement savings Look at your spending and subtract Social Security to get a sense of what you'll need from your portfolio. If your spending doesn't align with roughly 4% or less of your portfolio, you may need to make some changes. Consider saving more, investing differently, putting off your planned retirement date, or adjusting how much you plan to spend in retirement. 5. Derisk your portfolio As you get within 10 years of retirement, you'll want to make sure that your asset allocation can help protect your retirement plan from getting derailed by market volatility. If equity losses happen early on in your retirement, you can spend from your safer assets and wait until the market recovers to pull from your stock portfolio. By thinking about retirement preemptively, you'll have a better sense of when you want to retire and what you want it to be like. Plus, you can make any course corrections needed to make it happen. ___ This article was provided to The Associated Press by Morningstar. For more personal finance content, go to Margaret Giles is a senior editor of content development for Morningstar. Margaret Giles Of Morningstar, The Associated Press Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
Associated Press
3 days ago
- Business
- Associated Press
Ready to retire in 5 years? Here's your checklist
Many of the best investing moves are made on autopilot. Just look at the track record of automatic payroll deductions and savings increases. Other investing decisions, like a transition into retirement, require a more hands-on approach. Christine Benz, Morningstar's director of personal finance and retirement planning, recommends taking a preemptive approach as you get closer to retirement. The key is to visualize what you want your retirement to look like while you have enough time to make any adjustments you might need to get you there. Here are five steps to take now if you plan to retire in the next five years: 1. Consider the role of work in retirement Decide whether some kind of work is realistically part of your retirement plan. That income stream can make your retirement spending simpler, but it shouldn't be the linchpin of your whole plan. That's because you may not be able to work even if you want to. 2. Track your expenses Understand what you're actually spending today and see whether your spending will change over the next few years and into retirement. Getting a grasp of your future spending needs will help you determine whether your plan is on track. 3. Check up on Social Security For most people, Social Security is a key source of income in retirement. Create an account on the Social Security website and make sure they have your correct information. This will let you model out different Social Security claiming dates using your own information. 4. Assess your current retirement savings Look at your spending and subtract Social Security to get a sense of what you'll need from your portfolio. If your spending doesn't align with roughly 4% or less of your portfolio, you may need to make some changes. Consider saving more, investing differently, putting off your planned retirement date, or adjusting how much you plan to spend in retirement. 5. Derisk your portfolio As you get within 10 years of retirement, you'll want to make sure that your asset allocation can help protect your retirement plan from getting derailed by market volatility. If equity losses happen early on in your retirement, you can spend from your safer assets and wait until the market recovers to pull from your stock portfolio. By thinking about retirement preemptively, you'll have a better sense of when you want to retire and what you want it to be like. Plus, you can make any course corrections needed to make it happen. ___ This article was provided to The Associated Press by Morningstar. For more personal finance content, go to Margaret Giles is a senior editor of content development for Morningstar.
