You can expect to feel financially strapped for several years after you file Chapter 13 bankruptcy. For the next three to five years, your finances and assets will be scrutinized under the microscope of your bankruptcy trustee and you will be making payments every single month to your creditors. If you decide to buy or sell a home during this time, you are at the mercy of the bankruptcy estate and the trustee.
You are certainly allowed to purchase a house while you are in Chapter 13 and you can sell one, as well, but the trustee will have to approve the purchase or sale prior to starting the process. Additional paperwork is often required and you should be prepared to spare extra time in case you are expected to obtain approvals.
If you are thinking about purchasing or selling a home while your Chapter 13 bankruptcy case is still underway, you should consult with an experienced bankruptcy attorney to help guide you through all of the intricate procedures and avoid any potential delays.
Chapter 13 - Selling a House
You will have to wait 21 days after your bankruptcy petition is filed to sell your home. The first thing you will have to do is file a motion to sell your home, which should include the appraisal of your home and any other documents that substantiate the value of your house. You will also be required to provide a proposal for the distribution of the profit you receive from the sale. If the trustee who is appointed to your bankruptcy case agrees that your motion to sell is reasonable, the court will usually approve it.
When the House Sells
You find a buyer and the sale on the house closes. This is when you will be required to file a Statement of Sale with your trustee, which includes the following information:
- The final sale price of the house
- Deductions from closing
- Mortgage balance
- Remaining profit
After you file the statement of sale, your trustee will expect you to make good on your initial proposal. If you agreed to pay any creditors off with the proceeds of your home or pay off the entirety of your debts, you will be expected to do so immediately after the sale of the house.
Chapter 13 - Buying a Home
Do not let the simple process of selling a home after filing bankruptcy sidetrack you - buying a home after filing a Chapter 13 bankruptcy is typically a much more complicated process.
Before you begin to search for your new home, you will need to ask your bankruptcy trustee for permission to incur more debt. Otherwise, you will not be able to secure a mortgage for the home. Your trustee will be more inclined to approve your request if you have been making your Chapter 13 bankruptcy repayment plan payments for a substantial amount of time, on time every month.
Do Banks Lend to People in Chapter 13?
The truth of the matter is that many banks will be leery about lending to people who have filed Chapter 13 bankruptcy. You do not want to be stuck with sky-high interest rates that are not affordable or variable rates that can change as time goes on. You will have to make your mortgage payment on top of your Chapter 13 payments and any other monthly bills you currently have, so the total monthly amount will need to be reasonable.
What About the Down Payment?
This will probably be the most difficult part of buying a new home while in Chapter 13. Coming up with the down payment or closing costs that are required to be paid in cash can be difficult, if not impossible. If you do not have a house to sell to obtain the down payment, the bankruptcy trustee will be scrutinizing where the funds for the down payment come from. If you were able to save up enough money for a down payment on a house, the trustee might feel like your disposable income is high enough to consider restructuring and increasing your bankruptcy payments.
If you have a family member who can gift you the down payment, that is usually the least tricky solution. Unfortunately, if you are receiving money from a family member, it most likely has to be run by the bankruptcy trustee, depending on how the funds are structured. This might be true even if your parents are footing the bill for your down payment.
These complications often dissuade people who are in the middle of Chapter 13 from buying a new home.
So you do not miss any important steps in the process, an experienced bankruptcy attorney should be your first call if you are considering purchasing or selling a home during your Chapter 13 bankruptcy. If motions need to be filed or contracts need to be adjusted, your attorney can help guide you through all of the related procedures.