Common Bankruptcy Myths About Chapter 13

Written by and from the perspective of a Michigan Mortgage Loan Officer

There are many myths associated with Chapter 13 bankruptcy, which is a legal process and financial tool that allows individuals to reorganize their debt. These structured repayment plans can be life savers to those who are struggling to make payments and need some relief.

In this interview with Rebecca Bartley, an Executive Loan Officer with Legacy Mortgage, we discuss some common bankruptcy myths associated with Chapter 13 of the Bankruptcy Code.

How Will Chapter 13 Affect My Credit in the Long Term?

Most of the time, a Chapter 13 repayment program will help you resolve credit problems much faster than just letting them linger and go into collections. Outstanding accounts that go to collections are almost impossible to pay off and will have much more of a negative effect in the long run than taking steps to resolve the debt issue.

Filing a Chapter 13 bankruptcy can save you from being sued and help avoid a judgment that may result in wage garnishments, putting you further behind.

How Bad Does It Look if I File a Chapter 13?

A Chapter 13 bankruptcy can actually help you in the long run. It can help you avoid many unwanted circumstances and lawsuits that result from unresolved debt issues. Aside from addressing underlying debt concerns, the repayment program can help relieve stress and the other financial burdens that come about for many different reasons.

Chapter 13 bankruptcies are much more common than people think, and they are not looked down upon as they used to be. Life and bad things happen to the best of us. If you find yourself in a financially difficult situation, this is an option you should consider. It is far more financially healthy to take this route and fix your situation than kicking the can down the road.

Is It Better to File a Chapter 13 Bankruptcy or Use a Debt Management Company?

In most cases, it is much better to file a Chapter 13 bankruptcy. Not only does this debt reorganization process help improve your credit quicker, but repayments are typically much less per month, affecting your credit less than you would think, especially if you get it filed before becoming too delinquent on payments.

Another thing worth noting is that most of those debt management programs are funded by the actual credit card companies, so while it isn’t necessarily a scam, it isn’t as beneficial to the consumer as a Chapter 13 bankruptcy.

Can I Purchase a Home if I File a Chapter 13 Bankruptcy?

Absolutely! Once you have been in the Chapter 13 program for at least 12 months, have some re-established credit, have made all bankruptcy payments on time, and obtain permission from the trustee to enter into a purchase, then it is very easy to obtain a mortgage. You will have to have a minimum credit score of 640.

A mortgage representative can work with you to keep things simple and make sure you are on the right track.

Can I Get a Loan While in Chapter 13?

Yes! You can apply for and obtain a loan while in a Chapter 13 repayment program with the permission of the trustee.

What Types of Loans Can I Get to Purchase a Home While in Chapter 13 Bankruptcy?

There are two types of loans that you can qualify for once in Chapter 13.

FHA (Federal Housing Administration) Loan

The first loan you can use to purchase a home would be an FHA loan. This loan requires you to have a 3.5% down payment of the purchase price plus the closing costs and escrows associated with the loan. Escrows are when taxes and insurance are taken out of the payment and put in an account to pay those expenses when they come due. The average closing costs, depending on taxes and insurance, are typically between $8,000 and $9,000. We do allow the sellers to pay some of the closing costs as long as they are willing to do so.

Family members are also allowed to give a gift of money to cover those expenses. Another option is to take a loan from your 401K, or if the 401K allows it, you can sometimes take a withdrawal since the purchased home will be your primary residence.

To qualify for this type of loan, you must:

• Be employed for two years, not necessarily in the same place, but in the same line of work, without switching employers more than three times in a calendar year.
• Have a debt-to-income ratio within the proper guidelines.
• Pay on the bankruptcy for at least 12 months and make all payments on time.

After all requirements have been met, we will then issue an approval letter and get permission from the trustee for you to enter into a mortgage. The trustee usually grants permission as long as the mortgage company is giving the approval and will fund the loan.

Rural Development Loan

The second type of loan that those in Chapter 13 can use to purchase a house is a Rural Development Loan. While this is a 0% down loan, there are still closing costs associated with this type of loan, typically between $8,000 and $9,000. As with the FHA loan, part of that is the escrows for taxes and insurance. If the market allows for it, you can ask the seller to pay some of the closing costs, and you can get a gift from a family member to cover these expenses.

The rules to qualify for this loan are the same as those for an FHA loan but with a couple distinctions. A Rural Development Loan is income-based, so you have to fit within the income guidelines. These loans are also geographically specific as to where they will qualify.

Is Chapter 13 Right for Me?

There are many misguided conceptions in the mortgage industry about the effects of filing and bankruptcy. More often than not, this is a great solution that can solve much more credit problems than just letting debts go unpaid or unresolved.

If you have any questions prior to deciding on this, I am always available to answer them to make you feel more comfortable with moving forward.

I can be reached via cell at 810-516-4227 or via email at Rebecca@legacy-mortgage.com. You are more than welcome to visit my website at www.rebeccabartley.com.

Start Your Journey to Financial Freedom With Acclaim Legal Services

At Acclaim Legal Services, our focus is supporting clients through the process of long-term debt resolution as they reclaim their financial independence.

If you're ready to see if a Chapter 13 repayment program is right for you, we have multiple locations throughout Michigan, including Flint, Lansing, Ann Arbor, and Detroit. Let us guide you toward a fresh start.