Chapter 7 and Chapter 13 are two different types of bankruptcy under the United States Bankruptcy Code, and they have distinct implications for handling debts, including home loans. If you are nervous that you might not be able to qualify for a home, we can discuss what options you may have now, or potentially in the future.
Here are the key differences between Chapter 7 and Chapter 13 bankruptcy regarding home loans:
Chapter 7 Bankruptcy:
1. Liquidation:
- Chapter 7 is often referred to as “liquidation” bankruptcy.
- Non-exempt assets may be sold to pay off creditors.
- Home equity may be used to satisfy debts, but there are exemptions that protect a certain amount of home equity.
2. Debt Discharge:
- Unsecured debts may be discharged, meaning you are no longer legally obligated to pay them.
- Secured debts, such as a home loan, may be discharged, but it often results in the loss of the property unless arrangements are made with the lender.
3. Quick Process:
- Chapter 7 bankruptcy is typically faster, with the process completed in a few months.
Chapter 13 Bankruptcy:
1. Reorganization:
- Chapter 13 involves a reorganization of debts.
- A repayment plan is developed, typically spanning three to five years, allowing the debtor to catch up on missed payments.
2. Home Preservation:
- Homeowners can use Chapter 13 to prevent foreclosure by catching up on mortgage arrears over the repayment period.
- The debtor retains their property and continues making regular mortgage payments.
3. Debt Repayment:
- The debtor pays a portion of their unsecured debts through the repayment plan, which is based on their disposable income.
4. Extended Process:
- Chapter 13 bankruptcy takes longer than Chapter 7 due to the extended repayment plan.
Considerations:
- Income and Assets:
- Chapter 7 is generally for individuals with limited income and assets.
- Chapter 13 is for those with a regular income who can make a repayment plan.
- Home Equity:
- Chapter 7 may put home equity at risk, depending on the state’s exemption laws.
- Chapter 13 provides a way to catch up on mortgage payments and preserve the home.
- Debt Types:
- Chapter 7 is more suitable for unsecured debts.
- Chapter 13 is appropriate for those with significant secured debts and a desire to keep their property.
Before deciding on bankruptcy, it’s crucial to consult with a qualified bankruptcy attorney to assess your specific financial situation and determine the most suitable course of action. The laws and exemptions can vary, and professional guidance is essential in navigating the bankruptcy process.
If you are considering purchasing a property, consult with us at Forever Home Financing to see what your purchasing options are for a mortgage. Depending on your scenario, we can help you consider your options!