You can file for bankruptcy if your debt becomes unmanageable to the point that you don’t think you’ll ever be able to pay it off. You can choose a Chapter 7 liquidation or Chapter 13 repayment plan. In both of these bankruptcy scenarios, you must submit your information to the courts, where a trustee will be appointed and will determine your options, what assets you can keep and what debts you can discharge.
You'll need the permission of your trustee to make any major purchases if you choose a Chapter 13 plan and you still have outstanding debt. Reviewing how consumers can get trustee approval for mortgages or other big expenditures will help you approach your trustee and make a better case.
Chapter 7 vs. Chapter 13
You can choose to file for a Chapter 7 liquidation bankruptcy if you want to completely walk away from your debt. Some of your personal assets will be sold, and the cash will be used to pay off your creditors. Depending on current laws and the state where you reside, some of your assets will be protected, such as your house, your car and retirement savings and investments.
You might have to file for Chapter 13 bankruptcy protection instead if your income is too high compared to your debt, explains United States Courts. This allows you to create a plan to pay back your debt without having to follow the agreements you currently have in place with your creditors. This can lower your monthly payments to help you pay your living expenses while you pay off your debt.
Your creditors might reduce part of your debt in this scenario. They might have to agree to smaller payments over a longer period of time. The court ultimately decides what will happen, and both you and your creditors will have to abide by the trustee's and judge's rulings.
Presenting Your Request
Your trustee might approve the purchase of a home during a Chapter 13 bankruptcy if your financial situation has improved enough that you can comfortably pay your monthly living expenses, your court-approved debt repayments and also add a mortgage payment to your monthly expenses.
Gather your paperwork to present to your trustee. This should include a balance sheet and a cash flow statement. A balance sheet is a list of your assets and liabilities, showing your net worth. A cash flow statement shows your monthly income and expenses for the year. You should also have copies of two or three recent bank statements and a personal budget covering your expected income and expenses for one year.
You'll have to show your trustee that you have steady, reliable income, which might include a contract or letter from your employer or letters from clients stating how much they plan to pay you during the coming year. You'll have to wait until you've made bankruptcy payments for at least one year if you're planning on applying for a mortgage backed by the Federal Housing Administration, according to FHA.com.
Write to your trustee using all your documentation. Outline your request and explain all the numbers you've researched. Direct the trustee to the specific documents you've provided to prove your case.
What Are Your Chances?
Part of the problem with trying to buy a house while in bankruptcy is that your trustee will probably feel that if you have $50,000 for a house down payment or a large sum of money to buy a house for cash (such as after receiving an inheritance or winning the lottery), that money rightfully belongs to your creditors.
Your trustee might approve the purchase as long as you're able to meet your original payoff agreement if you’ve already made bankruptcy payments for two or three years of your five-year agreement and you now have extra income.
What About the Bank?
A mortgage lender will be hesitant to give you a loan if you're currently in bankruptcy even if you have solid income and a perfect record of paying off your court-approved debt payments. Obtaining a mortgage is more likely to happen if you've made two or more years of debt payments and if you have a big enough down payment and a high credit score.
- Because state laws differ, consult your attorney before writing your letter to the trustee.
- Typically, if you have fallen behind on your plan payments, the trustee will not give you permission to buy a home.
- The trustee might request a meeting with you before granting approval for your home purchase.
- Your new loan payments -- if approved -- are separate from your current bankruptcy payment plan. If you default on the new home loan, you will lose the home. You may not file another bankruptcy until the trustee discharges your current bankruptcy.
Steve Milano has written more than 1,000 pieces of personal finance and frugal living articles for dozens of websites, including Motley Fool, Zacks, Bankrate, Quickbooks, SmartyCents, Knew Money, Don't Waste Your Money and Credit Card Ideas, as well as his own websites.