Can I Get a Home Equity Loan During or After a Bankruptcy?

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Even though the information on this web page is provided by a qualified industry expert, it should not be considered as legal, tax, financial or investment advice. Since every individual’s situation is unique, a qualified professional should be consulted before making financial decisions.


In the following article, we will discuss in detail the impact that bankruptcy can have on your ability to obtain a home equity loan (HEL).

We will compare the different types of bankruptcy filings and what you can expect to find when applying for a HEL. We’ll also explore alternative options that you may not be aware of that can address your needs probably even better than a home equity loan.

If you or someone you know needs to learn how to get a home equity loan after bankruptcy and if you can get one during it, you’ll want to read on.


Getting a Home Equity Loan with a Chapter 7 Bankruptcy

Let’s consider two scenarios: if you need a home equity loan while still going through bankruptcy, and then after the bankruptcy discharge. Please note that the same rules explained below apply to getting a home equity line of credit (HELOC) while in or after bankruptcy.


Is It Possible to Get a Home Equity Loan While in Chapter 7 Bankruptcy?

Unfortunately, you would not be able to get a home equity loan while in Chapter 7 bankruptcy for a number of reasons. Your assets are largely controlled by the bankruptcy court.

When you borrowed money to buy your home, you signed a note (which is the loan) and a mortgage (which is the lien). Chapter 7 bankruptcy wipes out the loan, but it does not wipe out the lien.

The lender can foreclose on your house if you are already behind on your payments, or if you fall behind on your payments later during bankruptcy. If you are current on your payments and can show that you are likely to be able to continue to make your payments, the lender will let you keep your home.

In Chapter 7 bankruptcy, you give up your non-exempt assets to repay as much of your debt as possible. The bankruptcy trustee assigned to your case will have complete authority over these assets. Any asset that is not exempt from their use will be sold to pay your creditors.

If you have a lot of equity in your home, unless your state exempts all your equity, the trustee will sell your home to use the equity. They will pay the lender so that the lien is removed, pay you the exempted portion of your equity, and use the rest to pay your creditors.

Even in states that completely exempt your equity in your home, any equity that is turned into cash while in bankruptcy is no longer exempt. A trustee would not allow you to access the equity by turning it into cash.


Can I Get a Home Equity Loan After a Chapter 7 Bankruptcy Discharge?

Yes, you can, but getting a home equity loan after bankruptcy will take patience.

Because a Chapter 7 bankruptcy leaves at least some of your creditors without being fully repaid, your credit will be severely impacted for a long time. The bankruptcy will stay on your credit report for 10 years. However, if you work on restoring your credit, you can get a home equity loan before then.

Conventional lenders make their own determination about when they will consider a loan application from someone who has been in bankruptcy. You might find some lenders who will consider your application after 3 years have passed.

Most lenders will require a waiting period of 5 to 6 years. The waiting period starts when your bankruptcy has been discharged.

Federal Housing Authority or FHA loans are more lenient. They will accept a lower credit score to make the loan, and a higher loan to value ratio with a weak score. You can get an FHA loan 2 years after the bankruptcy discharge.

Remember, all this assumes that you have repaired your credit and that you have enough equity in your home to qualify for an equity loan.


Getting a Home Equity Loan with a Chapter 13 Bankruptcy

Is It Possible to Get a Home Equity Loan While in Chapter 13 Bankruptcy?

Chapter 13 bankruptcy doesn’t eliminate your debts. It gives you an opportunity to pay them, or as much of them as you can. A plan is prepared to allow you to restructure your debt payments based on your disposable income.

You will have to pay all of your disposable income to your creditors for either 3 or 5 years, depending on your income level. The amount you can pay is split among your creditors according to the plan.

At the end of the plan, any amount left unpaid on non-priority unsecured debt, like credit cards and medical bills, is discharged. Basically, your creditors are accepting a settlement of the amount owed to them, and the bankruptcy plan is allowing you to pay that over time.

It would be difficult to justify new payments from a home equity loan during bankruptcy. Your creditors are owed all of your income after deducting allowed living expenses. This is your disposable income. You cannot decrease the amount paid to the creditors by starting a new loan.

If you get a raise or bonus during the bankruptcy period, the excess funds would be additional disposable income that is owed to your creditors. It’s doubtful that your creditors would agree to give up funds owed to them so that you can make new debt payments.

For these reasons, it is not likely that you could get a home equity loan while paying Chapter 13 plan payments.


Can I Get a Home Equity Loan to Pay Off a Chapter 13 Bankruptcy?

One way that you could get a home equity loan during Chapter 13 bankruptcy is if the proceeds are used to pay off your creditors. This would have to be approved by your creditors, the trustee, and the bankruptcy court.

You would have to have made all the agreed plan payments on time and have enough equity in your home to justify the loan.

Bear in mind that the payoff amount will not necessarily be the amount of your current payment multiplied by the remaining months in the plan. When your creditors originally approved the plan, it included expected future increases in your income.

They will expect the payoff amount to reflect this. In some cases, they or the court can decide that the bankruptcy will not be discharged without full payment of the original amount that you owe.


Can I Get a Home Equity Loan After a Chapter 13 Bankruptcy Discharge?

A person who has had a Chapter 13 bankruptcy discharged can get a home equity loan. You will need to have kept your credit clean since the bankruptcy and have enough equity in your home. Your home equity loan bankruptcy option will be impacted by the type of loan you want.

Conventional lenders decide on loan policy for themselves and terms may vary. The impact of a Chapter 13 bankruptcy on your credit rating will probably not be as bad as that of a Chapter 7, but it will hurt the rating.

This may determine how much a lender will lend you. Instead of 80% of the value of the house, the Loan to Value ratio, they may lend a lesser amount.

The credit requirements for an FHA loan are less than those of a conventional loan, which will help you borrow more.

As for when you can get a home equity loan with bankruptcy on your record, that also depends on the type of loan you’re getting. Conventional loans have a mandatory 2 year waiting period after a Chapter 13 bankruptcy discharge date, while FHA loans can be available 1 year after discharge.


Is There a Simpler Option than a Home Equity Loan in a Bankruptcy Situation?

To rebuild your finances you need access to every financial tool possible, including the equity in your home. Having a bankruptcy on your record will make this more difficult. While bankruptcy is a legitimate method of dealing with a bad financial situation, it will damage your credit.

There is another financial tool that you may not be aware of called a leaseback. With the help of an experienced real estate investor, a leaseback can be a quick and simple solution for any homeowner in this situation.


What Is a Leaseback?

A leaseback occurs when a property owner sells their property but continues to stay in it by renting it from the buyer, often with an option buy the house back later.

The commercial world has used this investment strategy for a long time. Investors recognized that a property is more desirable if it already has a tenant in it that will sign a new lease.

Until recently, in residential markets, leasebacks have largely been used to accommodate the seller by letting them stay for a short term until their new home can be occupied.

Real estate investors have realized that a long term leaseback to the seller holds the same attraction for them as it did for their commercial brethren.


When to Opt for a Leaseback Agreement?

When a homeowner who has a recent bankruptcy on their record needs cash, the equity in their home may be the only answer. Getting to those funds with a home equity loan will involve waiting a year or more, and will not get them 100% of their equity. It also creates new debt for them to service which hurts their cash flow.

Selling your home and leasing it back from the buyer will get you all of your equity quickly with no debt payments. This can be especially effective in helping you get back on your feet financially and buy your house back.

What if you are in a strong seller’s market and want to take advantage of high home values but won’t be able to qualify for a loan to buy a replacement home? A leaseback will let you sell when you can get the most for your home and buy later when you can get a mortgage loan.


What Are the Pros and Cons of a Leaseback for Homeowners?

There are a lot of benefits to using a leaseback. One of the most important factors is that you can get 100% of the equity out of your home. An equity loan will typically give you 80% of your home’s value.

However, if you’ve had a bankruptcy, the loan to value ratio could be even lower. With a bankruptcy on your record you will need to have a large amount of equity for a loan to do you very much good.

You can get to the funds quickly. After bankruptcy, you will need to wait 1 to 3 years or more depending on the type of bankruptcy you experienced. A leaseback of your home can be done within months after the discharge of your bankruptcy.

Compared to a loan, your monthly expenses will be lower which enables you to save or invest for the future more quickly:

  • you won’t have the equity loan payment
  • although you will have to maintain the property, you should not be responsible for major maintenance and repairs.

When negotiating the rent, you should try to stay at or below your current mortgage payment amount.

Many leaseback agreements include a repurchase option so that at the end of the lease you can either extend it or buy your house back.

The main disadvantage is that you no longer own your home until you repurchase it. This means that you are no longer building equity in your property with your housing payments.

However, other investments may give you a higher return than annual property value appreciation. When you are rebuilding your finances, you may need to start with the highest and best use of your cash and grow from there.


How Does a Leaseback Work for Homeowners?

Make sure that you are dealing with an experienced, reputable real estate investor. Interview them and ask how long they have been investment property owners and how many homes they currently own.

Ask if they manage their properties themselves or do they use a management firm. Ask about their process and how long the transaction will take.

The sale of the property will be easier than selling to another homeowner. There will not be any brokers or lenders involved, so there is less paperwork and fewer inspections.

In addition to the purchase contract, there will be a lease to negotiate. You may want to have an attorney help you with this. The lease will contain specifics that include:

  • the length of the lease
  • the amount of rent
  • the amount of a security deposit and how it is handled
  • the renter’s responsibilities
  • the landlord’s responsibilities
  • what happens at the end of the lease, notably if you can repurchase the property.

For your protection, you should insist on a pre-lease inspection of the property with the buyer.

Once all documents have been signed and the funds have been transferred, you’re done. No moving or storage of personal items, no interruption of your daily life. You can start rebuilding your credit and your finances in the comfort of the home in which you have lived.


How not to Get into a Bad Leaseback Agreement

Unfortunately, not all investors offer leasebacks to help homeowners. Some of them entice homeowners into an agreement with bad terms hidden in the contract and extremely low offer for the home. They intend to drain the homeowner’s funds and then keep the property they got for cheap.

A reputable leaseback company will discuss with the homeowner their ability to pay the lease amount prior to entering an agreement to find the best solution ensuring the win-win terms.

Before accepting the leaseback agreement terms, it’s imperative to do your research on the reputation of the company, read clients’ reviews, study the agreement terms and meticulously estimate your financial capabilities.

As a national platform connecting distressed homeowners with real estate investors, HouseCashin maintains relationships with reputable and professional leaseback firms all over the USA. To get equity from your home despite bad credit history and purchase the property back later, connect with a top-rated leaseback company in your location by filling out our simple online form.

About the Author
David Cook | Hard Money Lender

David Cook is the President and sole owner of Contessa Capital, LLC along with two related entities that operate in the commercial finance space, specifically in real estate and the factoring of accounts receivables. David began his business career more than 20 years ago as a commercial lender with Comerica Bank before transitioning into the commercial finance industry with Strategic Finance, Inc., a boutique merchant bank that provided factoring, lending, and advisory services. As one of the principals of Strategic, David helped facilitate the sale of the business to a regional bank in 2002. David spent the next seven years with Wells Fargo Capital Finance in a business development role and then four years with Amegy Bank Business Credit as a senior manager over affiliate markets outside of Texas.

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