Can I Buy a House While in Bankruptcy Chapter 13?

By George Raymondo

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.

If you have any questions, please Contact me or request a FREE Credit Analysis.