Moving on with your life after bankruptcy is a top priority. People want to reestablish themselves professionally, personally, and financially after they discharge their debts, but that isn’t always as simple as you might expect it to be. One of the biggest questions posed to bankruptcy lawyers by clients is whether they can make major financial moves, such as getting a home equity loan after bankruptcy.
It is always a good idea to discuss these decisions with your attorney or a financial planning expert since it can be easy to get into a frame of mind of celebration after your discharge and make decisions too quickly and lightly. Here are some facts you need to know before jumping into the home equity loan application process:
Because of the nature of bankruptcy, most people do not pursue a new line of credit or loan during the process. With your finances already under close examination and scrutiny, that may not be the best time to consider those types of decisions. It also may not even be a possibility.
During a chapter 7 bankruptcy, your assets are essentially under control by the bankruptcy court through which you filed. There are several reasons why they would not allow you to open a new line of credit or loan during this time.
First, your home loan debt may have been wiped out during the bankruptcy process, but the lien against your home incurred with a mortgage was not. Oftentimes, if homeowners are behind on their mortgage payments when they file for bankruptcy, this means that they have their mortgage foreclosed and lose their home as part of the agreement. If they are current on all payments and can demonstrate that they have sufficient income to remain current, they will likely keep their home.
To keep from losing your home, you are also not allowed to access your home’s equity during the bankruptcy process. This means that if your home’s value is excluded and you are allowed to keep it, the condition is that the value remains within the home and that the owner not be allowed access to it as cash.
Things may be slightly different in chapter 13 bankruptcy but being allowed to obtain a home equity loan during the process is still very unlikely. During chapter 13 bankruptcy, you are working with creditors and the bankruptcy court to create a repayment plan, rather than having your debts discharged. This means that you have the means to repay your debts if they are restructured, but only if they are restructured in a way that works for your current income and assets.
Usually, losing your home to foreclosure is not a concern during chapter 13 bankruptcy unless you offer your home as part of the repayment agreement. However, it is doubtful that any bank will agree to let you take out a home equity loan during this time since your finances are still in flux. The only way most consumers can receive a home equity loan during this time is if they agree to use the proceeds from that loan to repay their creditors, which means they do not get to use any of the funds for personal expenses or investment.
In general, your best bet is to wait and try to get a home equity loan after bankruptcy.
When it comes to getting a home equity loan after bankruptcy, your ability to do so depends on several factors. One of the most important is whether you have a stable, verifiable income.
Additionally, you will need to talk to a bankruptcy attorney about how the chapter of bankruptcy that you filed may impact your ability to get a home equity loan. There are a few differences in the way bankruptcy works between chapter 7 and chapter 13, and that includes how they impact your financial decisions moving forward.
A chapter 7 bankruptcy focuses on freeing you from debt. This is a great option for people who are severely underwater with no way to repay their creditors. However, it also has some serious drawbacks when it comes to financially rebounding right away.
The primary concern is that your creditors are not repaid in full during a chapter 7 bankruptcy. As such, the bankruptcy itself will damage your credit rather harshly. It also remains on your credit report for ten years after discharge. While you can certainly work on rebuilding your credit during this time, doing so can be a slow process. It is also one of the only ways that you will be eligible for any kind of loan or line of credit during that ten-year period.
There are some banks that might consider granting you a home equity loan in as little as three years after bankruptcy, but again, this is mainly dependent on how well you work toward repairing your credit during that time. Other banks may insist that you wait until 5-7 years afterward, and others will not approve you unless the bankruptcy is off your report entirely.
Things are once again a little different if you opted to go with chapter 13 bankruptcy. Since the impact to your credit of a chapter 13 bankruptcy is less than a chapter 7, you will have a much easier time getting a home equity loan after discharge. However, it may still take some time. You must keep your credit clean during this time and be willing to negotiate with your lender or bank, since they may only be willing to offer you around 80% of the total amount you might otherwise get.
Still not sure about your options? Talk to an experienced bankruptcy attorney at The Van Horn Law Group. They can help you navigate the entire bankruptcy process, including choosing the right course of action for your unique financial situation and knowing what steps to take before, during, and afterward to get the results you’re hoping for.
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