This chapter of the Bankruptcy Code provides for adjustment of debts of an individual with regular income. Chapter 13 allows a debtor to keep property and pay debts over time, usually three to five years.
A chapter 13 bankruptcy is also called a wage earners plan. It enables individuals with regular income to develop a plan to repay all or part of their debts. Under this chapter, debtors propose a repayment plan to make installments to creditors over three to five years. If the debtors current monthly income is less than the applicable state median, the plan will be for three years unless the court approves a longer period “for cause.” (1) If the debtors current monthly income is greater than the applicable state median, the plan generally must be for five years. In no case may a plan provide for payments over a period longer than five years. 11 U.S.C. § 1322(d). During this time the law forbids creditors from starting or continuing collection efforts.
This chapter discusses six aspects of a chapter 13 proceeding: the advantages of choosing chapter 13, the chapter 13 eligibility requirements, how a chapter 13 proceeding works, making the plan work, and the special chapter 13 discharge.
Filing for Chapter 13 bankruptcy can feel like a major setback when it comes to finances and credit. But it doesn’t have to derail dreams of homeownership. With the right planning and preparation, you can get approved for a mortgage loan, even while in an active Chapter 13 bankruptcy.
Chapter 13 bankruptcy allows people with regular income to repay debts over 3-5 years through a court-approved repayment plan. This type of bankruptcy helps people catch up on missed mortgage payments over time while avoiding foreclosure.
Here are some key things to know about Chapter 13 bankruptcy
-
The repayment plan lasts 3-5 years on average.
-
Your assets are protected as long as you make plan payments.
-
Creditors must stop collections and foreclosure actions.
-
Some debts like student loans may not be discharged
-
Monthly payments are made to a bankruptcy trustee who distributes funds to creditors.
-
After completing the repayment plan, eligible debt is discharged.
-
Bankruptcy stays on credit reports for 7-10 years.
Qualifying for a Mortgage in Chapter 13 Bankruptcy
The good news is FHA, VA, and USDA home loans allow you to qualify for a mortgage as early as 12 months into your Chapter 13 repayment plan. Here are some requirements to meet for mortgage approval:
-
Wait at least 12 months from filing Chapter 13 to apply for a mortgage.
-
Make all bankruptcy plan payments on time. Payment history is closely evaluated.
-
Get written permission from the bankruptcy court/trustee to take out a new mortgage.
-
Meet all other mortgage qualifications besides bankruptcy waiting periods. This includes credit score, income, and down payment requirements.
As long as you meet standard eligibility criteria, you can qualify for low down payment FHA loans, 0% down VA loans, or rural USDA loans with 12 months of Chapter 13 bankruptcy payments.
How to Improve Your Chances
Here are some tips for improving your odds of getting approved for a home loan during Chapter 13:
-
Work on credit: Get a secured credit card and make payments on time to start rebuilding your credit score. Dispute any errors on your credit reports.
-
Save for a down payment: FHA loans allow down payments as low as 3.5%, but larger down payments result in better rates/terms.
-
Keep accounts open: Having open installment loans and credit cards with on-time payments strengthens credit profiles.
-
Get pre-approved: Going through pre-approval shows lenders you can qualify and starts the mortgage process.
-
Research lender options: Compare FHA and VA lenders to find the best mortgage rates and terms. Ask about credit exceptions.
-
Be patient: Give yourself time to improve credit and save money before applying. Waiting 18-24 months improves your changes.
Buying a Home After Chapter 13 Bankruptcy
What if your Chapter 13 bankruptcy has already been discharged? Here’s what you need to know about getting approved after bankruptcy:
-
FHA loans require a 2-year waiting period after discharge before applying for a mortgage.
-
VA loans allow you to apply after Chapter 13 discharge with no waiting period.
-
USDA loans have no waiting period after a discharged Chapter 13 bankruptcy.
-
Conventional loans require 2 years from discharge and 4 years from filing before applying for a mortgage.
So your best options for buying a home right after a Chapter 13 discharge are FHA, VA, and USDA loans. You may be able to get approved as soon as 2 years post-discharge.
Tips for Rebuilding Your Credit
Here are some smart tips for strengthening your credit after Chapter 13 bankruptcy:
-
Open one new credit card 6 months after discharge and use it responsibly.
-
Consider taking out a credit builder loan and repay it on time.
-
Limit credit inquiries by only applying for loans/cards you need.
-
Ask creditors to report your positive payment history to credit bureaus.
-
Wait 1-2 years to apply for a mortgage for better rates.
-
Get a copy of your credit report and dispute any errors.
When to Avoid Chapter 13 Altogether
For some homeowners, filing Chapter 13 bankruptcy may not make financial sense. Here are signs Chapter 13 could be the wrong path:
-
You can’t afford the Chapter 13 repayment plan payments.
-
Your income is irregular and bankruptcy payments would be a struggle.
-
You have significant non-exempt assets creditors could claim.
-
Your mortgage arrears and other debts are low enough to repay outside bankruptcy.
-
You have high equity with risk of cross-collateralization on your home.
For people who don’t qualify for Chapter 13 or want to avoid it, mortgage modifications, repayment plans, forbearance, or Chapter 7 bankruptcy could be better options.
Partnering With the Right Mortgage Lender
If you’re ready to move forward with a mortgage during or after Chapter 13 bankruptcy, make sure you choose the right lender. Look for an experienced loan officer who can guide you through the process. Be sure to ask potential lenders these questions:
-
Do you have experience getting loans approved specifically for Chapter 13 borrowers?
-
What are your credit score requirements and guidelines around bankruptcy?
-
Are there any fees or upfront costs for applying, even if I’m denied?
-
How quickly can you pre-approve me and help me make an offer if I find a home I want?
-
Can I speak directly to a loan officer who will work with me throughout the entire loan process?
The more knowledge you gain about the mortgage process in Chapter 13, the better prepared you’ll be. With careful planning and an experienced lender on your side, you can overcome bankruptcy and buy a home.
The Chapter 13 Hardship Discharge
After confirmation of a plan, circumstances may arise that prevent the debtor from completing the plan. In such situations, the debtor may ask the court to grant a “hardship discharge.” 11 U.S.C. § 1328(b). Generally, such a discharge is available only if: (1) the debtors failure to complete plan payments is due to circumstances beyond the debtors control and through no fault of the debtor; (2) creditors have received at least as much as they would have received in a chapter 7 liquidation case; and (3) modification of the plan is not possible. Injury or illness that precludes employment sufficient to fund even a modified plan may serve as the basis for a hardship discharge. The hardship discharge is more limited than the discharge described above and does not apply to any debts that are nondischargeable in a chapter 7 case. 11 U.S.C. § 523.
- The “current monthly income” received by the debtor is a defined term in the Bankruptcy Code and means the average monthly income received over the six calendar months before commencement of the bankruptcy case, including regular contributions to household expenses from nondebtors and including income from the debtors spouse if the petition is a joint petition, but not including social security income or certain payments made because the debtor is the victim of certain crimes. 11 U.S.C. § 101(10A).
- In North Carolina and Alabama, bankruptcy administrators perform similar functions that U.S. trustees perform in the remaining forty-eight states. The bankruptcy administrator program is administered by the Administrative Office of the United States Courts, while the U.S. trustee program is administered by the Department of Justice. For purposes of this publication, references to U.S. trustees are also applicable to bankruptcy administrators.
- Section 507 sets forth 10 categories of unsecured claims which Congress has, for public policy reasons, given priority of distribution over other unsecured claims.
- A fee of $25 is charged for converting a case under chapter 13 to a case under chapter 7.
How Chapter 13 Works
A chapter 13 case begins by filing a petition with the bankruptcy court serving the area where the debtor has a domicile or residence. Unless the court orders otherwise, the debtor must also file with the court: (1) schedules of assets and liabilities; (2) a schedule of current income and expenditures; (3) a schedule of executory contracts and unexpired leases; and (4) a statement of financial affairs. Fed. R. Bankr. P. 1007(b). The debtor must also file a certificate of credit counseling and a copy of any debt repayment plan developed through credit counseling; evidence of payment from employers, if any, received 60 days before filing; a statement of monthly net income and any anticipated increase in income or expenses after filing; and a record of any interest the debtor has in federal or state qualified education or tuition accounts. 11 U.S.C. § 521. The debtor must provide the chapter 13 case trustee with a copy of the tax return or transcripts for the most recent tax year as well as tax returns filed during the case (including tax returns for prior years that had not been filed when the case began). Id. A husband and wife may file a joint petition or individual petitions. 11 U.S.C. § 302(a). (The Official Forms may be purchased at legal stationery stores or downloaded from the Internet at www.uscourts.gov/bkforms/index.html. They are not available from the court.)
The courts must charge a $235 case filing fee and a $75 miscellaneous administrative fee. Normally the fees must be paid to the clerk of the court upon filing. With the courts permission, however, they may be paid in installments. 28 U.S.C. § 1930(a); Fed. R. Bankr. P. 1006(b); Bankruptcy Court Miscellaneous Fee Schedule, Item 8. The number of installments is limited to four, and the debtor must make the final installment no later than 120 days after filing the petition. Fed. R. Bankr. P. 1006(b). For cause shown, the court may extend the time of any installment, as long as the last installment is paid no later than 180 days after filing the petition. Id. The debtor may also pay the $75 administrative fee in installments. If a joint petition is filed, only one filing fee and one administrative fee are charged. Debtors should be aware that failure to pay these fees may result in dismissal of the case. 11 U.S.C. § 1307(c)(2).
In order to complete the Official Bankruptcy Forms that make up the petition, statement of financial affairs, and schedules, the debtor must compile the following information:
- A list of all creditors and the amounts and nature of their claims;
- The source, amount, and frequency of the debtors income;
- A list of all of the debtors property; and
- A detailed list of the debtors monthly living expenses, i.e., food, clothing, shelter, utilities, taxes, transportation, medicine, etc.
Married individuals must gather this information for their spouse regardless of whether they are filing a joint petition, separate individual petitions, or even if only one spouse is filing. In a situation where only one spouse files, the income and expenses of the non-filing spouse is required so that the court, the trustee and creditors can evaluate the households financial position.
When an individual files a chapter 13 petition, an impartial trustee is appointed to administer the case. 11 U.S.C. § 1302. In some districts, the U.S. trustee or bankruptcy administrator (2) appoints a standing trustee to serve in all chapter 13 cases. 28 U.S.C. § 586(b). The chapter 13 trustee both evaluates the case and serves as a disbursing agent, collecting payments from the debtor and making distributions to creditors. 11 U.S.C. § 1302(b).
Filing the petition under chapter 13 “automatically stays” (stops) most collection actions against the debtor or the debtors property. 11 U.S.C. § 362. Filing the petition does not, however, stay certain types of actions listed under 11 U.S.C. § 362(b), and the stay may be effective only for a short time in some situations. The stay arises by operation of law and requires no judicial action. As long as the stay is in effect, creditors generally may not initiate or continue lawsuits, wage garnishments, or even make telephone calls demanding payments. The bankruptcy clerk gives notice of the bankruptcy case to all creditors whose names and addresses are provided by the debtor.
Chapter 13 also contains a special automatic stay provision that protects co-debtors. Unless the bankruptcy court authorizes otherwise, a creditor may not seek to collect a “consumer debt” from any individual who is liable along with the debtor. 11 U.S.C. § 1301(a). Consumer debts are those incurred by an individual primarily for a personal, family, or household purpose. 11 U.S.C. § 101(8).
Individuals may use a chapter 13 proceeding to save their home from foreclosure. The automatic stay stops the foreclosure proceeding as soon as the individual files the chapter 13 petition. The individual may then bring the past-due payments current over a reasonable period of time. Nevertheless, the debtor may still lose the home if the mortgage company completes the foreclosure sale under state law before the debtor files the petition. 11 U.S.C. § 1322(c). The debtor may also lose the home if he or she fails to make the regular mortgage payments that come due after the chapter 13 filing.
Between 21 and 50 days after the debtor files the chapter 13 petition, the chapter 13 trustee will hold a meeting of creditors. If the U.S. trustee or bankruptcy administrator schedules the meeting at a place that does not have regular U.S. trustee or bankruptcy administrator staffing, the meeting may be held no more than 60 days after the debtor files. Fed. R. Bankr. P. 2003(a). During this meeting, the trustee places the debtor under oath, and both the trustee and creditors may ask questions. The debtor must attend the meeting and answer questions regarding his or her financial affairs and the proposed terms of the plan.11 U.S.C. § 343. If a husband and wife file a joint petition, they both must attend the creditors meeting and answer questions. In order to preserve their independent judgment, bankruptcy judges are prohibited from attending the creditors meeting. 11 U.S.C. § 341(c). The parties typically resolve problems with the plan either during or shortly after the creditors meeting. Generally, the debtor can avoid problems by making sure that the petition and plan are complete and accurate, and by consulting with the trustee prior to the meeting.
In a chapter 13 case, to participate in distributions from the bankruptcy estate, unsecured creditors must file their claims with the court within 90 days after the first date set for the meeting of creditors. Fed. R. Bankr. P. 3002(c). A governmental unit, however, has 180 days from the date the case is filed file a proof of claim.11 U.S.C. § 502(b)(9).
After the meeting of creditors, the debtor, the chapter 13 trustee, and those creditors who wish to attend will come to court for a hearing on the debtors chapter 13 repayment plan.
FHA Loans for Borrowers with a Chapter 13 Bankruptcy
FAQ
How does Chapter 13 affect mortgages?
Can I get an FHA loan while in Chapter 13?
How can I borrow money while in Chapter 13?
What is the average monthly payment for Chapter 13?
What types of mortgages are available in Chapter 13 bankruptcy?
There are several types of mortgages available for someone in Chapter 13 bankruptcy. These include FHA loans, VA loans, and USDA loans. However, each of these options has specific requirements and waiting periods.
Can I get a home loan after Chapter 13 bankruptcy?
After **Chapter 13 bankruptcy**, you can indeed qualify for a home loan.
Can I get an FHA loan during Chapter 13?
To qualify for an FHA loan during Chapter 13, you need to be at least 12 months into your repayment plan. And you must have made all Chapter 13 payments on time. In addition, the bankruptcy court or bankruptcy attorney needs to give written permission for you to take out a new mortgage loan.
Does Chapter 13 pay mortgage lenders?
Many Chapter 13 filers will pay mortgage lenders directly. However, sometimes the bankruptcy court and Chapter 13 trustee appointed to oversee your case require you to make your mortgage payments through your Chapter 13 plan. This payment process is most common when you owe arrearages when you file. The trustee will pay your lender each month.