Bankruptcy Chapter 13 and 7

What you can do when paying the Trustee

 

You need to find out what they will allow you to do.

Each state (and every trustee) is different in what they will and will not allow. That's the not-so-fun part, but before you go straight to your trustee, my advice would be to run the idea by your bankruptcy attorney.

He/she should act as a sounding board to determine if your idea has merit (i.e., you need a new car, bigger house, credit card, etc.) and if it's something the trustee might allow.

By first going to your bankruptcy attorney, he may be able to give you some advice that will help you present a stronger case to your trustee. Remember, it's usually about numbers, not emotion.

Can I Purchase a New Home while in a Chapter 13 Bankruptcy?

 

Yes, if your trustee allows. There's the trustee to contact again.

 

First of all, you need to know that your options are limited.

FHA and VA will allow you to purchase a home while you're still in a Chapter 13 bankruptcy, but for the most part all other lenders won't touch this until you're discharged or your Chapter 13 bankruptcy is paid.

If you want to get approved for an FHA or VA mortgage, these programs require:

1. That you've been in your plan at least 12 months
2. You've made all of your trustee payments on time
3. You qualify for the monthly mortgage payment

4. Your monthly debt-to-income ratio must be less than 43%—if it's more, you'll need to wait until you either reduce your monthly debt or you're within 10 months of paying off any installment debt.

For example, let's say your annual income is $60,000. That breaks down to $5,000 a month. Multiply $5,000 x .43 and you get $2,150. Your total monthly debt in this example could not exceed $2,150 per month. "Debt" would include:

1. Mortgage payment
2. Monthly property taxes
3. Homeowner’s insurance
4. Car loans
5. tudent loans
6. Other installment loans
7. Your trustee payment

Am I the only one who thinks it's odd that a debtor's payment to their trustee can actually be used by lenders to reestablish credit?

Your revolving debt is also figured into your debt-to-income ratio. There is a glimmer of hope though...only the minimum monthly payment is calculated on revolving accounts (such as credit card accounts).

Now let's talk loan amounts.

 

With a VA loan, the maximum loan amount on a purchase is $417,000 nationwide.

The maximum loan amount from FHA varies by county. You can go here for more information about your county's maximum loan amount on the purchase of a home.
Using Equity in Your Home to Pay Off Your Chapter 13 Bankruptcy and Get Discharged Sooner

If you have equity in your home, it may make sense to use it to accelerate your discharge.

If your trustee approves, a skilled mortgage banker can tap the equity in your home through refinancing to pay off a Chapter 13 bankruptcy early. It could speed up your recovery.

FHA will refinance up to 95% of your home's value (less your mortgage balance) as long as you meet the 4 qualifications mentioned above. Any mortgage financing other than FHA or VA will require you to pay off your Chapter 13 bankruptcy before having access to your equity.

Then there's Texas. The only way you're gettin' your equity in this Stateis if you sell the House.

 

Trustees nationwide are becoming more stringent about allowing filers to pay off a Chapter 13 bankruptcy early.

The potential glitch is each state views paying off a Chapter 13 bankruptcy early differently. Some states will allow it after 36 months in your plan...others require you pay the entire debt of what is owed to your creditors. Yes, I said entire debt, not just the balance on your plan.

It's best to discuss these options with your bankruptcy attorney to assess what is acceptable in your state. If you can get your trustee's approval, then contact your mortgage lender to proceed.

ANOTHER OPTION FOR REFINANCING A HOME.

If you've been paying on your Chapter 13 bankruptcy for less than 12 months or have a delinquent payment history—a non-conforming refinance is another option.

Late mortgage payments or late trustee payments will affect your interest rate and how much they'll loan based on your home value.

 

The interest rate and amount a lender will loan is based on.

• Your Chapter 13 payment history
• Your mortgage payment history
• Your middle FICO credit score

Can you finance a car while in a Chapter 13 bankruptcy?

 

Yes, but it won't be through a mainstream lender at a normal interest rate. Until you're discharged, financing a car will be expensive.

You'll be forced to accept some high interest rates. Either pay cash for a car, or drive an Ugly Duckling rental car before paying a double-digit interest rate on a car.

Credit Cards During your Chapter 13 Bankruptcy!

 

When it comes to credit cards, you have a choice between applying for a secured or unsecured credit card.

"Unsecured" basically means that there are no assets guaranteeing your credit card. This is more risky for lenders because if you default, there's no way for them to recoup their loss.

An unsecured credit card will be extremely difficult to get before you're discharged...if not impossible.

 

As a side note always have a Plan A and a Plan B so you won’t be caught.

So, since Plan A (an unsecured credit card) is probably out of reach for you at the moment, here's your Plan B......a secured credit card.
A secured credit card is very similar to an unsecured credit card. The only difference is that you must put money on deposit and the amount of your deposit becomes your credit limit. The money you have on deposit allows the lender to recover their money if you default.

For example, let's say you put a $500 deposit on an unsecured credit card. This means you can charge up to $500 on the card. If by chance you do charge $500 on the card, and you don't pay your bill, the card company keeps your deposit—and you won't be able to use the card anymore.

The deposit acts as a safety net for the card issuer. Believe it or not, even these types of credit cards can be difficult for Chapter 13 bankruptcy filers to acquire before they are discharged.

Here are the credit guidelines of the secured bankcard program recommended for Chapter 13 Filers:

• They don't care if your bankruptcy is discharged. That means, if you have an open Chapter 13 bankruptcy it doesn't matter. As long as your check clears...and they can verify you're a U.S. citizen...your approval is guaranteed.

• The annual percentage rate (APR) is 21.60% and is a competitive APR for a secured card.

 

• Their annual fee of $20 is better than some unsecured card programs.

• There is no universal default clause. A universal default clause means that a lender can raise your rates simply because you missed payments with some other lender. This bank will not do this.

• Their minimum deposit is $500. A little higher than I would prefer, but not out of reach for most people who file Chapter 13.

• Their maximum deposit is $5,000. This is great because with most secured card programs you can't efficiently use the card because you tend to get too close to the credit limit (maxing it out), which lowers your FICO credit scores.

• They will pay you .5% interest on your security deposit. This means that when your card converts to an unsecured card, you will get a check for more than you started with. Sweet!
• They can convert the card to unsecured and return your deposit after 24 months of on-time payments.

• They do review your credit reports, so there will be a credit inquiry.

 

The 4 Most Important Actions to Take During Your Chapter 13 Bankruptcy

 

Even if you're not discharged yet, there are steps you can take now to improve your credit rating. The four most important things you can do are:

 

1. Dispute inaccurate information appearing on your credit reports. Do this yourself or hire someone to do it for you.

 

2. Learn how to manage your credit differently to increase your credit scores. These are actions that you must do yourself.

3. Continue to make your Chapter 13 bankruptcy payments on time. Here's why...lenders can use your trustee payments to show a good payment history.

4. If possible, pay off your Chapter 13 bankruptcy sooner. You'll recover faster.

Using these strategies while you're still in your Chapter 13 bankruptcy will put you well ahead of the crowd that does nothing to improve their credit while in bankruptcy.

With higher FICO credit scores, once you're discharged you'll hit the ground running...while others will hit the ground crawling...or limping.

 

The difference between you and them was that you began increasing your credit scores.

 

Converting Your Chapter 13 Bankruptcy into a Chapter 7

 

Whether you should convert your Chapter 13 bankruptcy is really a question for your attorney.

 

A "conversion" is when you switch an existing type of bankruptcy to another.

 

In this case, you'd be converting a Chapter 13 bankruptcy to a Chapter 7 bankruptcy.

 

A conversion is not the same as having your Chapter 13 bankruptcy dismissed then filing a Chapter 7. That's actually two different bankruptcies.

 

These are the things I'd consider if I was thinking about converting to a Chapter 7 bankruptcy:

 

1. How much longer do I have until I finish my Chapter 13 payment plan?

2. Can I afford the monthly payment as it is now?
3. Can I finish my payment plan?
4. What does my bankruptcy attorney advise me to do?
5. What will I lose by converting to a Chapter 7 bankruptcy?
6. What will I gain by converting to a Chapter 7 bankruptcy?

You see, from a credit scoring perspective, having one bankruptcy appear on your credit reports is the equivalent of an atomic bomb. Converting to a Chapter 7 bankruptcy could be the equivalent of two atomic bombs.

However, having said that, time can heal most things. And depending on your specific circumstances, it can sometimes make sense to convert— especially if you're very proactive about your recovery.

Many People Convert from Chapter 13 Bankruptcy to Chapter 7

According to a famous study done by Elizabeth Warren in her book, The Fragile Middle Class: Americans in Debt—about 1-in-3 Chapter 13 filers convert to a Chapter 7.

I think the conversion rate is much higher...probably two-thirds of Chapter 13s convert.

 

Many lenders consider a conversion the same as two bankruptcies. So you double the damage.

 

In addition, there may be things you wanted to keep that go bye-bye when you convert to a Chapter 7 bankruptcy.

 

For advice specific to your situation, talk with a bankruptcy attorney.

There is one type of lender that doesn't view a conversion as two bankruptcies...mortgage lenders. They are the only lenders lenient toward converted bankruptcies.

The good news is: should you decide to convert, you can still recover from bankruptcy.