Right now, this question is more pressing than ever. As of December 30, 2020, mortgage rates were at all-time lows. These low rates will probably not last. If the coronavirus pandemic fades in 2021 and more people buy houses, rates will go up. If the coronavirus pandemic extends into 2021 and Congress passes more stimulus measures, the resulting pressure on Treasury notes will drive up mortgage rates. This all complicates the question, Can I buy a house while in Chapter 13 bankruptcy?

This question is really two questions. First, there is the legal possibility of buying a house in Chapter 13 bankruptcy. Second, there are obvious practical considerations. A Georgia bankruptcy lawyer address both these sub-questions. An attorney advocates for you in what is usually a tough fight with creditors. Furthermore, a Georgia bankruptcy lawyer typically has professional associations with bankers.

Why People File Bankruptcy in Georgia

Many people are surprised to learn that the reason for your filing has a direct relationship on your ability to buy a house during Chapter 13.

A persistent bankruptcy myth, mostly fueled by credit card companies, is that reckless overspending causes most bankruptcy filings. But in most cases, that’s not true. Overspending is often a minor factor. The main factor is usually high medical bills or another financial crisis which is entirely or mostly beyond the debtor’s control.

Frequently, the financial crisis triggers credit card overuse. If Ramon loses his job, he will probably use his credit cards to pay bills. This approach is not sustainable for more than a month or two.

Anyway, if a financial crisis that has since passed prompted the bankruptcy filing, it is much easier for a Georgia bankruptcy lawyer to convince a judge that additional debt would be in the debtor’s best interests and not substantially harm creditor interests.

Borrowing Money During Bankruptcy in Athens, GA

These two elements, debtor’s best interests and creditors’ best interests, are the two principle issues in a motion to assume additional debt. Since the debtor is under the bankruptcy court’s supervision, debtors cannot technically borrow any money, such as taking out a mortgage, while they are in Chapter 13. Courts often look the other way when it comes to small debts, like a secured credit card with a tiny credit limit. But they will not ignore something like a mortgage.

Incidentally, debtors cannot avoid this issue by paying cash for the house or making the payments through another entity, like an LLC. The trustee (person who oversees the bankruptcy for the judge) will almost certainly accuse the debtor of bankruptcy fraud, which is an extremely serious matter.

Creditors’ interests are usually the sticking point in these matters. If the debtor wants to borrow money, creditors usually argue that, instead of allowing the debt, the judge force the debtor to increase the amount of the monthly debt consolidation payment. In other words, instead of giving this extra money to a mortgage company, you should give it to me.

Frequently, this approach is not a bad idea. If the debtor can now afford a mortgage payment, the debtor can probably afford to pay off the bankruptcy early. Court supervision ends at that point.

Practical Considerations During Your Bankruptcy in Georgia

The nuts and bolts must be decided before a Georgia bankruptcy lawyer can file a motion to acquire indebtedness. The judge will want to see documentation, such as a sales contract, before making a decision.

Finding a house the debtor can afford is usually not a problem. Financing that house, especially if the buyer is in Chapter 13 bankruptcy, is another matter.

Many lenders steadfastly refuse to work with people who are in bankruptcy or have filed bankruptcy, because to them, the risk is too high. Other lenders do the exact opposite. They welcome people with bad credit. Buyers with low credit scores pay higher interest rates, which means the lender makes more money.

Your Georgia bankruptcy lawyer typically has professional associations with lenders who work with bad credit borrowers. So, a lawyer often points these debtors in the right direction.

Even in the unlikely event it keeps you from buying a house, Chapter 13 is still a good idea. The Automatic Stay prohibits repossession, wage garnishment, and other adverse creditor actions. And, when the bankruptcy ends, the judge discharges (erases) most unsecured debts, like credit cards and medical bills.

Is It Possible to Get a Mortgage While in Bankruptcy in Georgia?

It was impossible to obtain a mortgage while in bankruptcy in the past. The mere word bankruptcy was enough for lenders to reject an applicant. Most people think they have to wait a minimum of seven years after a Chapter 13 bankruptcy filing to purchase a home.

Those in Chapter 13 bankruptcy in Georgia could qualify for an FHA mortgage even before the bankruptcy is discharged in some cases. If a borrower is at least 12 months into the payout period of bankruptcy, they could qualify for an FHA-insured mortgage. The borrower’s payment performance through the bankruptcy payout period must have been satisfied satisfactorily, with every payment being made on time. The bankruptcy court must have provided written permission for the borrower to obtain a mortgage.

Chapter 7 Versus Chapter 13

Getting a mortgage is easier to do after a Chapter 13 bankruptcy than after a Chapter 7 bankruptcy. Government-backed mortgage options like FHA, VA, and USDA loans will often let you apply while in Chapter 13 as long as you are at least a year into repayment.

Chapter 7 filers typically have to wait a minimum of two years after the discharge of their bankruptcy to apply for a mortgage. Additionally, the applicant must prove that they have re-established a timely payment history. The other option is to incur no new debts within that time period, not even a credit rebuilder loan or credit card. Occasionally, a lender will accept a shorter time than two years if the borrower can show extenuating circumstances leading to the initial bankruptcy filing.

With Chapter 13, a mortgage applicant has to show 12 months of on-time payments to their bankruptcy repayment plan. A year is the minimum wait time before applying for a new mortgage loan. Waiting isn’t the only requirement, though. Any borrower currently in Chapter 13 bankruptcy must acquire permission from the bankruptcy court before applying for a mortgage.

Why Do Lenders Look More Favorably on Chapter 13 Than Chapter 7?

It’s typically easier to obtain a mortgage after a Chapter 13 filing than after a Chapter 7 filing. Chapter 7 filers have to wait until the bankruptcy court discharges their bankruptcy, while Chapter 13 filers can sometimes obtain a mortgage while still in bankruptcy. Why the difference in treatment between the two?

Lenders look more favorably on Chapter 13 applicants because they view those borrowers as someone who is trying to repay creditors rather than walk away from them. That doesn’t mean that those applicants will automatically be approved. In all likelihood, borrowers who have filed for Chapter 13 bankruptcy will have several additional hurdles to cross before being approved.

The easiest loans to get during or after a bankruptcy filing are government-backed loans. Conventional loans like Freddie Mac or Fannie Mae tend to impose longer waiting periods than those for government-backed loans like FHA, VA, or USDA loans.

What Are Considered Extenuating Circumstances?

If the bankruptcy filing was due to extenuating circumstances, the borrower might have an easier time qualifying for a loan. That begs the question, what is considered an extenuating circumstance? One-time events that are beyond the borrower’s control and have an extensive negative impact on the finances are considered extenuating circumstances.

Some examples of extenuating circumstances include a company layoff, a severe illness or disability, or the death of the primary wage earner in the household. Should the Chapter 13 filing fall into one of these categories, the waiting period changes to two years after dismissal for a conventional loan. However, the borrower still must wait two years after a discharged bankruptcy.

Here are the criteria Freddie Mac uses to determine if a bankruptcy meets the extenuating circumstance rule:

• Were the events outside the borrower’s control?
• Is the problem resolved?
• What is the likelihood of the problem recurring?

This test doesn’t apply to every lending program. You need to talk to the lenders you are interested in working with to determine if you qualify for a mortgage during or after your bankruptcy.

Qualifying for A Mortgage After Chapter 13

Suppose you’ve met the 12-month repayment requirement for a government lender. Does that mean you automatically qualify for a mortgage? Unfortunately, the answer to that question is no; you won’t necessarily automatically qualify. There are other lending guidelines to be met before a lender will consider loaning to someone in or recently out of bankruptcy.

Traditional requirements for mortgage applications still apply even if you could qualify due to being in repayment for more than a year. These requirements include appropriate credit score, income, employment and employment history, and down payment. Likely, anyone attempting to borrow funds while in or just out of bankruptcy will have to supply additional information, such as the reason for filing bankruptcy and when it was discharged or dismissed.

Expect underwriters to scrutinize every financial detail you submit, and you should do the same. Take a realistic look at your finances to determine whether you can afford a down payment and a subsequent mortgage payment while still maintaining your previously agreed upon repayment plan.

Contact Morgan & Morgan Georgia Bankruptcy Lawyers Today

You can often buy a house while you are in Chapter 13. For a free consultation with an experienced Georgia bankruptcy lawyer, contact Morgan & Morgan, Attorneys at Law, P.C. Convenient payment plans are available.