When you file for Chapter 13 bankruptcy, your home becomes part of the bankruptcy estate. Nonetheless, you can still retain your property and live there. But what if you plan on buying a house? Here’s a look at buying a house while in Chapter 13 and how the process works.
You can buy or sell a home while in Chapter 13 bankruptcy. There’s no law or rule saying you can’t. Nonetheless, there will probably be more paperwork involved and more time needed to get the approvals required. But that doesn’t necessarily have to stop you from moving forward with your plans.
How the Process Works
Chapter 13 bankruptcy is a reorganization of your debts and requires paying back your creditors. After filing, you’ll need the trustee’s permission to incur new debt. Additionally, being current on debt payments and avoiding having past due accounts increase your odds of getting approved for a mortgage. Some of the factors you need to consider in obtaining a loan include:
Being Qualified by the Lender
Banks are often more stringent when lending to people in Chapter 13 bankruptcy. Lenders do have loans for people in an active Chapter 13 (including the Federal Housing Administration (FHA)), but many require you to have been so for at least one year. All your payments must have been made on time as well.
Approval By the Court
As a debtor in Chapter 13, you must obtain permission from the bankruptcy court to buy a new home. This usually involves filing a motion with the court. It can take up to 45 days to schedule a hearing on the motion, so you should obtain approval sooner rather than later. You’ll need to provide information such as the home price, amount of down payment, source of the payment, and what your monthly payment will be.
You’ll also need to submit:
- Proof of current income, using pay stubs, receipts, etc.
- A monthly budget should the home loan be approved.
- Whether the purchase will impact payments to creditors.
The court will likely approve your request if buying a home doesn’t adversely affect your creditors. It also helps if the house payment will be similar to what you’re paying now. However, if your expenses will be significantly higher, it can be more difficult to obtain the court’s approval.
If your trustee gave approval for a mortgage, the court is likely to approve the motion. But that is not a guarantee. If it approves, the court will amend your repayment plan, showing you’re able to pay your mortgage loan (you can then complete your loan application).
Meeting Down Payment Requirements
The source of funds for your down payment on a home will be scrutinized by your trustee, unless you’re selling a previous home to obtain these funds. Your trustee will check to see if you’ve saved up enough and have sufficient income to handle higher payments. There are limits to obtaining personal loans, as they are a form of credit, even if you receive a monetary gift from family.
Overall, there’s no type of loan you are completely excluded from when in Chapter 13 bankruptcy. The waiting period for an FHA loan is typically shorter. If you are planning on applying for a loan, work to repair and rebuild your credit, write a letter of explanation providing your lender details about your bankruptcy, and get preapproved. Your lender may have questions after receiving your application, so respond promptly to lender inquiries and provide honest answers to their questions.
Contact OakTree Law
If you need to know more about buying a house while in Chapter 13, our Los Angeles bankruptcy attorney can provide assistance. We can help you get back on your financial feet or find other alternatives to managing your debt. The bankruptcy process can be complex, but we’ll work with you to find a solution that addresses your current situation and future plans. To get started, request a free evaluation online or call 888-348-2609 today.