One of my favorite things to do as a bankruptcy lawyer is to crush the lies about the bankruptcy process that seem to be all over the Internet.
The number one lie out there is that someone who files bankruptcy will never be able to buy a house.
That’s simply not true. But don’t take my word for it. Just don’t take your uncle’s word for it. Call a mortgage lender. Ask them if you’ll be able to buy a house if you file bankruptcy. If there’s anyone you should listen to, it’s them.
The current mortgage underwriting rules (which set forth the criteria for allowing a lender to approve a mortgage loan) allow a person to qualify for a mortgage two years after they file a Chapter 7 bankruptcy or after they’ve made twelve payments to the trustee in a Chapter 13 bankruptcy.
Over the last few years I’ve had several of my Chapter 13 clients purchase homes.
Of course, being in a Chapter 13 bankruptcy means that there is a process that someone has to go through to qualify for a mortgage loan.
And for Colorado, this is what it is:
First, you only need to follow this process if your lender requires a letter from the trustee. Currently, neither the Chapter 13 trustees nor the Colorado bankruptcy court require debtors to formally apply for approval to get a mortgage loan while they are in an active Chapter 13 repayment plan.
Most lenders, however, will want a letter from the trustee stating that the trustee is okay with you getting a mortgage loan. The Colorado Chapter 13 trustees require you to submit an application (a simple one page form your attorney should have or that you can get from the trustees’ offices). Along with the application you need to provide recent income information and amended schedules I and J (income and expenses).
Naturally, your new income and expenses should demonstrate that you have the ability to pay for your mortgage without changing how much you are paying to your unsecured creditors in your repayment plan. I would expect the trustee to push back hard if taking on a mortgage means that your unsecured creditors are going to be paid less. Personally, I wouldn’t submit an application if it meant there was going to be a significant reduction to unsecured creditors. I think it’s a waste of the trustee’s time and sets my clients up for disappointment.
One thing to be on the lookout for: if you’ve had the good fortune for an increase in income since your case was filed or your new mortgage will actually reduce your monthly expenses, you can expect the trustee to require you to modify your plan to increase your Chapter 13 payment. That big raise you got that you thought meant more spending cash in your bank account is going to have to go to your creditors. Your attorney should be on the lookout for this issue as well, and you may want to hold off on getting a mortgage until after you finish your Chapter 13 bankruptcy.
Chapter 13 bankruptcy is a whole other animal, complex with many moving parts. If you’re thinking about filing bankruptcy, you should talk with an experienced lawyer who can take you through the minefield of the process safely.
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