What is required of debtors who buy a home during Chapter 13 bankruptcy?
Homes can be bought during Chapter 13 with court oversight
Timing, court permission and federal housing rules all play a role when debtors are in the process of purchasing a home while their Chapter 13 bankruptcy continues.
Buying a new house during bankruptcy isn't prohibited. However, the U.S. Bankruptcy Court strictly regulates such purchases because Chapter 13 debtors aren't allowed to borrow more than $500 without permission from the trustee overseeing their cases.
Once the Chapter 13 case is under way and the creditor repayment plan begins, any request to borrow money must be filed with the court. Debtors are generally allowed to proceed with the purchase as long as they are current in their monthly payments and in a financial position to obtain a new home without placing the creditor plan in jeopardy.
Since most people need to sell their existing home in order to purchase a new one, the court must agree to the sale of the debtor's current house. Related issues such as refinancing a mortgage, borrowing money with a house as collateral and financing home improvements also requires court approval.
In addition to obtaining permission from the trustee and the bankruptcy court, the request must meet home loan underwriting requirements of the U.S. Department of Housing and Urban Development (HUD).
These underwriting rules state that people in a Chapter 13 case can purchase a home as long as they have a Federal Housing Administration (FHA)-insured mortgage. To do so, they must have completed at least one year of filing payments within their creditor plans and have a letter from the court trustee stating the amount of money they are allowed to borrow.
Some attorneys believe that the point when such requests are made during the Chapter 13 process - which lasts from three to five years, depending on the debtor's income - is crucial. Debtors are in a better position to obtain a home loan if they allow a certain amount of time to elapse during the repayment period beyond the minimum requirement.
"Some predatory lenders will be happy to charge you very high interest rates to buy a house," states Phoenix bankruptcy attorney Diane Drain."After 18 months of perfect payments to your Chapter 13 trustee and to your mortgage lender, then most good lenders will extend a new loan."
If the home purchase is approved after filing Chapter 13, it is not included in the bankruptcy estate and isn't subject to claims by creditors who are receiving installments from the repayment plan.