Home Loan Chapter 13 Bankruptcy Mortgage Guidelines


Home Loan Chapter 13 Bankruptcy Mortgage Guidelines

This BLOG On Home Loan Chapter 13 Bankruptcy Mortgage Guidelines Was UPDATED On November 5th, 2018

Can you get a home loan while in a Chapter 13 bankruptcy?

  • Yes You can!
  • First let me explain what is a Chapter 13 bankruptcy?
  • A Chapter 13 bankruptcy is a reorganization of debt where a filer pays out his or her monthly disposable income, per the means test calculator, and over a period of up to 60 months
  • During this time bankruptcy trustee monitors the plan payments
  • The trustee administers the plan payments, and distributes payments to the creditors based on priority
  • The payments then go to secured debt, such as mortgage, car payments, and taxes
  • Any leftover money goes to the unsecured creditors who get a percentage of the unsecured debt
  • This can be pennies on the dollar
  • During this time period you cannot acquire new debt without the bankruptcy court’s approval
  • Although you need the bankruptcy court approval, you can still buy a house during an active Chapter 13 bankruptcy

Qualifying For Home Loan Chapter 13 Bankruptcy

There is not one single American that has not experienced the effects of the economic downturn. 

  • Consumers who escaped job loss or bankruptcy surely know a family member or friend that was not so lucky
  • Many people lost their jobs
  • Had to walk away from house payments they could no longer afford
  • Filing bankruptcy is considered a catastrophic event
  • Bankruptcy is known to cause emotional and physical distress
  • The decision to file bankruptcy is not one that is taken lightly
  • Many times an individual or a couple will put off filing bankruptcy for years, dealing with creditor phone calls, letters, and lawsuits

Bankruptcy Abuse Prevention And Consumer Protection Act Of 2005

Filing bankruptcy is not as easy as it was before the year 2005.

  • The implementation year of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005
  • This act makes it difficult for filers to file a Chapter 7 bankruptcy;
    • a liquidation of assets that happens over a few short months

Chapter 7 Means Test

Under the new bankruptcy laws, filers must pass a Chapter 7 means test.

  • The first step of the test is the filer’s entire household income
  • The household income needs to be less than the median national income threshold
  • But, if the filer’s income is above the median national income, then he or she  has to move to the next step of the means test, which is the calculation of monthly disposable income
  • The means test takes into account the filer’s household income and expenses

The calculation allows expenses per the Internal Revenue Service National Guidelines.

  • These expenses include housing, housing, such as utilities and maintenance, transportation, and out-of-pocket healthcare costs
  • If the filer lives in a high cost county, the housing allowance is higher
  • Additionally, having more dependents allows for a higher income threshold
  • Having a car payment also kicks in the additional operating costs of up to $562, which is only allowable if the filer finances or leases a vehicle
  • If there is remaining income, also referred to as monthly disposable income, the filer does not qualify for a Chapter 7 bankruptcy petition

Getting Credit While In Chapter 13 To Qualify For Home Loan Chapter 13 Bankruptcy

Can you get credit while in a Chapter 13 bankruptcy?

  • Or buy a car? 
  • Is it OK to buy a house?
  • The answer is yes, yes, and yes!!!!!
  • This is great news because being in a Chapter 13 payment plan over 60 months is equivalent to being in debtor’s prison
  • Living off of cash and not using credit cards takes lots of training and requires a lifestyle change
  • It is very difficult, especially for Chapter 13 filers, to save money
  • This is because all of their monthly disposable income is paid out to the bankruptcy trustee

Buying a Car During Chapter 13 Bankruptcy

Buying a car in a Chapter 13 bankruptcy is as easy as finding a lender willing to loan the money to a Chapter 13 bankruptcy filer:

  • It is going to a quick hearing to get the bankruptcy judge to allow the new debt
  • A bankruptcy judge will likely approve the debt if it is reasonable
  • It does not take money away from the creditors
  • Many times family members will come up with the down payment for the filer
  • A bankruptcy judge understands that a filer needs to get to work in order to continue making their plan payments
  • Trustee and courts realize that not having a car can create a severe hardship.

Buying Home Loan Chapter 13 Bankruptcy

Home buyers can buy a house during Chapter 13 bankruptcy.

  • Both VA and FHA Guidelines allows for a Chapter 13 filer to obtain a home purchase loan
  • What are the requirements?
  • Need to be in a Chapter 13 Repayment Plan for at least 12 months
  • There is no waiting period after Chapter 13 Bankruptcy discharged date to qualify for VA and FHA Home Loans
  • A Chapter 13 borrower must have a history of timely and verifiable Chapter 13 payments
  • The Chapter 13 trustee can print out a transaction of payments upon request to verify the payments

Next, you must write a letter of explanation of the bankruptcy filing and provide this letter to the lender.

  • You must qualify for the loan
  • Can’t have  new collections after the bankruptcy filing
  • Need to have stable and verifiable income
  • The final step is to have the bankruptcy court approve the new debt
  • Need to file a motion with the bankruptcy court to get permission to acquire a new house payment
  • Once the bankruptcy court approves the new debt, you are on the way to home ownership

About The Author Of Home Loan Chapter 13 Bankruptcy Mortgage Guidelines

Arlene Disessa of Residential Home Loans is a senior writer of California Home Loans with Gustan Cho Associates, a highly reputable and top-rated mortgage banker.  Arlene Disessa holds a Master’s Degree in Business Administration and has over a decade of experience leading government audits of national and global corporations.  If you have a credit score of at least 580, stable income, and verifiable rental payments for one year you can purchase a home.  Our goal is to help you realize your dream of home ownership.


1 Comment
  1. Gustan Cho of CrossCountry Mortgage says

    There is not a day that goes by that we do not get a borrower applying for a FHA LOAN AFTER CHAPTER 13 BANKRUPTCY.

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