In Chapter 13 bankruptcy, all your disposable income goes to your creditors for 3 to 5 years. If you want to buy a house during this period, you'll have to ask the bankruptcy court for approval.
Talk to the Trustee
The U.S. Courts website says that when you file a petition to begin Chapter 13, you have to submit a payment plan. The plan gives you and your family enough to live on, but everything else goes to your creditors. At the end of the plan period, the court wipes out your remaining debts, with exceptions such as child support. If your income changes while you're in bankruptcy, the court may adjust your payments accordingly.
To take on more debt, you need bankruptcy court approval. To request this, you present the amount you think you'll spend on housing every month to the court trustee overseeing your case. She recommends to the judge whether to greenlight the purchase. Questions you'll have to deal with:
- Why do you need to buy a house? If you just want to move up or buy a vacation home, that's going to be a tough sell. If you're trading down to a smaller home with smaller payments, that might be more persuasive.
- Where are you getting the down payment? If you've scraped together $40,000, the trustee may ask why you're not including that money in your payment plan. The Duncan Law firm says most clients buying during bankruptcy rely on family to put up the down payment.
- Are you making your plan payments? If you can't keep up with your payment plan as is, the court's not going to approve adding more debt.
If you receive extra money after you file, you have to report it to the trustee. Courts differ on whether windfalls such as cash gifts should be included in the payment plan so your creditors get more. If your bankruptcy judge allows you to keep your windfall, you'll have more money to put toward a house.
Talk to Lenders
Bankruptcy is a big negative on your credit report. The more of a credit risk you look, the higher your interest rate will be and the more of a down payment you'll need.
One way to improve your chances is to seek a Federal Housing Administration loan. FHA loans come with government guarantees that protect the lender against losing money. This allows for lower interest rates and lower down payments. You have to wait at least one year into your bankruptcy to qualify. If you've made all your payments on time and the trustee approves, the FHA may too. You will have to explain the reasons for your bankruptcy.
Even after you have FHA support, you may need to shop around to find a lender who'll offer you a livable interest rate. The FHA notes that a year or more of on-time bankruptcy payments to your creditor is the best evidence you can offer that you've gotten your financial act together.
The law firm Grossbart, Portney & Rosenberg says that if a family member is willing to cosign for the mortgage, this can go a long way to making you more mortgage-worthy. Another option is to downsize your expectations and buy a smaller house, so that you'll find it easier to make a substantial down payment.
- U.S. Courts: Chapter 13 — Bankruptcy Basics
- Nolo: Post-Petition Debts in Chapter 13 Bankruptcy
- Duncan Law: Can I Purchase a House While in Chapter 13 Bankruptcy?
- Department of Housing and Urban Development: How Does a Bankruptcy Affect a Borrower's Eligibility for an FHA Mortgage?
- Nolo: I Received a Cash Gift During my Chapter 13 Bankruptcy. What Happens?
- U.S. Courts. "Federal Court Finder." Accessed May 18, 2020.
- U.S. Courts. "Chapter 7 Means Test Calculation." Accessed May 18, 2020.
- U.S. Dept. of Justice. "LIST OF APPROVED PROVIDERS OF PERSONAL FINANCIAL MANAGEMENT INSTRUCTIONAL COURSES (DEBTOR EDUCATION) PURSUANT TO 11 U.S.C. § 111." Accessed May 18, 2020.
A graduate of Oberlin College, Fraser Sherman began writing in 1981. Since then he's researched and written newspaper and magazine stories on city government, court cases, business, real estate and finance, the uses of new technologies and film history. Sherman has worked for more than a decade as a newspaper reporter, and his magazine articles have been published in "Newsweek," "Air & Space," "Backpacker" and "Boys' Life." Sherman is also the author of three film reference books, with a fourth currently under way.