Matthew Rimmer

Bankruptcy is an uncomfortable subject for a variety of reasons. The most obvious is the potential havoc it can wreak on your finances. Running a close second is the negative stigma which is often attached to the process. This negativity is important to mention because strong emotions can sometimes lead to unsound financial decisions with devastating results.

Bankruptcy becomes a viable option for someone who is "upside down" in terms of cash flow. In other words, when a person has more money going out each month than coming in, bankruptcy should be considered if no reversal of this negative cash flow is within sight. The longer someone waits to explore the various options available, the more serious his or her situation may become.

One of the worst things people can do in this situation is to borrow more money to try and pay off their debts. On paper, this is clearly an unwise financial decision. In the real world, however, it is very common for individuals to pursue this strategy in an attempt to buy time and hold off on filing for bankruptcy. On the surface, this is certainly a noble notion; however it can often compound the problem and serves only to delay the inevitable.

For many homeowners in the midst of this upside down cash flow, speaking to a qualified mortgage professional is a much better option. An experienced loan officer can objectively look at your finances and help you determine if restructuring your mortgage would not only help, but possibly even alleviate any need for bankruptcy.

If bankruptcy is the only option, seek out a reputable bankruptcy attorney and credit counselor. A qualified mortgage specialist can provide references for you as well, as he or she works with these professionals on a regular basis. Reliable references are essential in this case because experienced professionals greatly increase the odds of a successful bankruptcy experience. It's that simple.

When filing for bankruptcy, be completely honest and accurate regarding every aspect of your financial situation. This includes any changes to your income which may occur throughout the process. Bankruptcy is a federal procedure, adjudicated by real judges, and scrutinized by representatives who coordinate with the Department of Justice, the FBI, and the IRS.

Here are some additional steps you can take to make the bankruptcy process as painless as possible:

• Save all paperwork regarding your bankruptcy, and keep it organized. This will prove beneficial after your bankruptcy as you now have all of the pertinent information in one place. Also, be sure to write down your discharge date. It's surprising how many people forget to do this.

• Establish a household budget. This can be accomplished in many ways, but there are several inexpensive computer programs available which do an excellent job.

• Throughout the bankruptcy, do your best to not only live below your means, but to save as much cash as possible. You never know what you may need it for once the process is completed.

• Be prepared for a barrage of junk mail. There will be sharks on the loose who are hoping to capitalize on your need for credit.

Tips for Rebuilding Credit:

• If you must buy a car, focus on transportation as opposed to style. Buy an inexpensive, used car, and try to get a loan for it. It's a good idea to figure out what your budget allows in terms of a dollar amount first. This means obtaining financing prior to looking for a car.

• Get a secured credit card. Secured credit cards allow for the cardholder to deposit a said amount of money into an account, thus establishing the spending limit of the card. Missed payments result in deductions from the account. Some of these cards will reward responsible borrowers by upping the limit without an additional deposit. Some will even convert the account into a traditional credit card. (Be wary of offers of "easy credit" or any card which asks you to call a 900 number. You will be charged for the call.)

• Meet with a credit repair specialist. Not only can they help you clean up the damage to your credit report, they can advise you on specific ways to rebuild the credit you lost as well.

While it does take time, there is definitely life (and credit) after bankruptcy. Some mortgage lenders will even lend to you within a year or so after a bankruptcy. If you're in serious financial trouble, the trick is to get the help and advice you need from professionals you trust.

New rules for FHA loans headed for House vote!

A bill that would allow the continued use of seller-funded down-payment assistance on FHA-backed loans now has the support of the National Association of Realtors and is headed to a full House vote after passing muster with a key congressional committee.

The Department of Housing and Urban Development has sought to end the use of seller-funded gifts -- which are typically provided by home builders through nonprofits like Nehemiah Corp. and AmeriDream -- saying they artificially inflate home prices and that loans that rely on them are more likely to end up in default. HUD has said losses on loans that rely on seller-funded gifts threaten to put its insurance fund in the red.

A sweeping housing bill that became law July 30, HR 3221 would bar FHA from recognizing seller-funded gifts as a valid source of funding for down payments beginning Oct. 1. If the ban takes effect, FHA would still allow down-payment assistance from family members, employers and nonprofits not funded by sellers.

In an attempt to "mend, not end" the use of seller-funded down-payment assistance, HR 6694 would tie its use to borrowers' credit scores.

Those with credit scores of 680 or more could continue relying on seller-funded gifts for FHA-backed loans and would be treated like other borrowers. Those with scores between 620 and 680 could use the gifts, but could pay higher FHA insurance premiums. The gifts would be off-limits for borrowers with scores below 620 until at least mid-2009, when the Secretary of Housing would be permitted to expand the program if it could be done without requiring taxpayers to subsidize FHA's insurance fund.

The National Association of Realtors, which had supported HUD's attempts to shut down seller-funded down-payment assistance programs, has endorsed the reforms proposed in HR 6694.

"NAR understands the concerns of critics of seller-funded down-payment assistance programs that these programs foster home-price inflation, increased delinquency and foreclosure risks, and potential negative impacts to the FHA Fund and taxpayers," the group said Monday in a letter lawmakers. But the proposed changes in HR 6694 "will mitigate the risk to the FHA fund by limiting such programs to less risky borrowers, and requiring those who do pose a greater risk to pay a higher premium."

NAR said borrowers who participate in seller-funded down-payment assistance programs should be required to receive home-ownership counseling. In its current form, HR 6694 would require anyone offering seller-funded down-payment assistance to make financial counseling available to borrowers, but would not require borrowers to accept.

The bill was approved by the House Financial Services Committee on Tuesday but faces votes before the full House and Senate. The chairman of the influential committee, Rep. Barney Frank, D-Mass., has said he thinks the Bush administration will support HR 6694, because it would allow FHA to continue using risk-based pricing for borrowers with low FICO scores, even if they are not relying on seller-funded gifts (see Inman News story).

However, the risk-based pricing that would be allowed under HR 6694 is more limited than the system HUD implemented for all FHA loan guarantees on July 14. Under that pricing system, borrowers with good credit pay upfront premiums of as little as 1.25 percent, while borrowers considered higher-risk pay as much as 2.25 percent.

Opponents of risk-based pricing questioned its fairness, and inserted a one-year moratorium on its use into HR 3221. The moratorium begins Oct. 1, and HUD has announced that in returning to a "one size fits all" pricing system it will increase upfront premiums to 1.75 percent, compared with 1.5 percent before risk-based pricing was implemented in July (see story).

As amended Tuesday by the bill's sponsor, Al Green, D-Texas, HR 6694 would allow FHA to continue to employ a form of risk-based pricing for borrowers who are not relying on seller-funded gifts -- but only if they have credit scores below 600. Green said the amendment was intended to clarify language in the bill that had previously specified only that FHA could employ risk-based premium pricing for any borrowers "with lower credit or FICO scores."

The risk-based pricing system introduced by HUD in July created a matrix of 18 different borrower classifications, using six ranges of credit scores and three ranges of loan-to-value ratios. That system allows not only for increased premiums for those with the lowest credit scores and highest loan-to-value ratios, but discounts for the borrowers judged to present the least risk.

A HUD spokesman told the Wall Street Journal that the department has "deep reservations" about HR 6694 in its current form.

Although Frank has said he expects the bill will be approved by the House, it could face tougher sailing in the Senate, where language banning the use of seller-funded gifts was inserted into HR 3221.