Contrary
to a Chapter 7 Bankruptcy, where consumer’s debt may be wiped clean, Chapter 13
is a reorganization of all debts and the court establishes a repayment plan.
The plan can be as short as 12 months or last several years. During this
period, the court warns the consumer not to incur any debt without the court’s
permission. Believe it not, here is where home buyers have an opportunity to
become homeowners. “A chapter 13 bankruptcy enables
individuals with regular income to develop a plan to repay all or part of their
debts. Under this chapter, debtors
propose a repayment plan to make installments to creditors over three to five
years. If the debtor’s current monthly
income is less than the applicable state median, the plan will be for three
years unless the court approves a longer period ‘for cause’”. (Source)
To
qualify for a home loan, you must first be able to show that you have made at
least 12-months of on time payments to the court-ordered Trustee. The key words
being “on time”; meaning no payments have been more than 29 days late.
Generally, government loan programs such as FHA, VA and USDA allow financing
during an active chapter 13 bankruptcy. However, the borrower must have at
least a 580 credit score in order to take advantage of most of these programs
and possibility all the way down to 500 credit score.
In some cases, the borrower’s credit will have gone dormant
during the bankruptcy, so it may be important to reestablish new credit like
financing a car or opening a secured credit card. You should run this by your
Attorney for their approval. Providing the credit is high enough to proceed,
the borrower should get pre-approved by an experienced Loan Officer. After
reviewing the borrower’s loan application, income, and asset documents, the
Loan Officer may be able issue a pre-approval and provide the borrower with a
copy of the loan application and fee sheet. The borrower’s Attorney will likely
file a Motion to Incur Debt with the Court. At this point, it would behoove
prospective borrower to work with an experienced Loan Officer, as the Court
will approve or deny the purchase of the home based on the parameters provided
by the Loan Officers. If the Court grants the Motion, the borrower will be free
to start looking for a home. There are a few extra steps that a borrower will
need to go through during the home loan process, but nothing too painful. Under
the guidance of a good Loan Officer, you may be able to fulfill your dream of
becoming a homeowner.
