Table of Contents
Home Equity Loan After Chapter 13
Discover important information you need to know about home equity loan after chapter 13.
Priority number one after declaring chapter 13 bankruptcy is moving on with your life.
After the discharge of their debts, individuals desire to restore themselves professionally, personally, and financially, but this is not always as straightforward as one might anticipate.
After filing for bankruptcy, one of the most frequently asked issues by clients is whether they can make significant financial changes, such as obtaining a home equity loan.
It is usually a good idea to discuss these issues with your attorney or a financial planning professional, as it is easy to be in a celebratory mood after your discharge and make hasty judgments.
Before submitting an application for a home equity loan, consider the following information.
Can I Get a Home Equity Loan During Chapter 13?
Due to the nature of bankruptcy, the majority of individuals do not apply for new lines of credit or loans during the process.
At a time when your finances are already under great scrutiny, it may not be the best moment to make such decisions. It may also not be an option.
Your assets are largely under the control of the court where you filed for bankruptcy during a chapter 7 bankruptcy.
There are a number of reasons why they would not permit you to acquire a new credit line or loan at this time.
First, your house loan obligation may have been discharged through the bankruptcy procedure, but the mortgage lien against your property was not.
Typically, if a homeowner is delinquent on their mortgage payments and files for bankruptcy, they will lose their home as part of the deal. If they are current on all payments and can demonstrate adequate income to remain current, it is likely that they will retain possession of their house.
In order to avoid losing your home, you are also prohibited from accessing the equity in your property throughout the bankruptcy procedure.
This means that if the value of your property is excluded and you are permitted to keep it, the value must remain within the home and the owner must not have access to it as cash.
Things may alter slightly under chapter 13 bankruptcy but obtaining a home equity loan throughout the process remains extremely unlikely.
In chapter 13 bankruptcy, rather to having your debts wiped, you arrange a repayment plan with your creditors and the bankruptcy court.
This indicates that you have the ability to repay your obligations if they are restructured, but only if they are restructured in a manner that is compatible with your present income and assets.
During a chapter 13 bankruptcy, losing your property to foreclosure is typically not an issue until you surrender your home as part of the repayment deal.
However, it is unlikely that any bank will allow you to obtain a home equity loan at this time because your finances are in turmoil.
The only way that the majority of consumers can acquire a home equity loan at this time is if they agree to utilize the proceeds to repay their creditors, meaning they cannot use the funds for personal expenses or investment.
In general, you should wait until chapter 13 to apply for a home equity loan.
Can I Get a Home Equity Loan After Chapter 13 Bankruptcy?
The ability to obtain a home equity loan after bankruptcy is contingent on a number of criteria.
One of the most crucial is whether or not you have a stable, provable source of income.
In addition, you must consult with a bankruptcy professional about how the chapter of bankruptcy you filed may affect your eligibility for a home equity loan.
There are several differences between chapter 7 and chapter 13 bankruptcy, including how they affect your financial decisions in the future.
Chapter 7 Bankruptcy
A chapter 7 bankruptcy focuses on debt discharge. This is an excellent choice for individuals who are significantly in debt and have no method to repay their creditors.
However, it has significant disadvantages in terms of immediate financial recovery.
During a chapter 7 bankruptcy, the biggest risk is that creditors would not be repaid in whole. Therefore, the bankruptcy itself will severely harm your credit.
Additionally, it stays on your credit report for ten years following discharge.
While it is possible to recover your credit during this period, it can be a slow process. In addition, it is one of the few methods you will be qualified for any type of loan or credit line during the ten-year period.
Some banks may consider offering you a home equity loan as early as three years after filing for bankruptcy, but this is again largely based on how well you manage to rebuild your credit during that period.
Other institutions may need you to wait 5-7 years, while others will not allow you until the bankruptcy is completely removed from your credit history.
Chapter 13 Bankruptcy
If you chose to file for chapter 13 bankruptcy, there are a few more differences.
Since a chapter 13 bankruptcy has less of an impact on your credit than a chapter 7 bankruptcy, you will have a much simpler time obtaining a home equity loan after discharge.
Nonetheless, it may take some time. During this time, you must keep your credit in good standing and be willing to bargain with your lender or bank, as they may only be willing to grant you 80 percent of the total amount you may normally receive.
Still unsure of your choices? Consult with a knowledgeable bankruptcy lawyer at The Van Horn Law Group.
They can guide you through the whole bankruptcy procedure, from determining the best course of action for your specific financial position to knowing what measures to take before, during, and after filing to achieve the desired results.
Advantages and disadvantages of using home equity after bankruptcy
Even if you qualify for a home-equity loan after filing for bankruptcy, it may not be your best financial decision.
Depending on the cause of your bankruptcy, you may need to overcome cash flow concerns or a propensity to incur excessive debt before borrowing against your home equity. Consider the following before borrowing:
Advantages:
➣ You may qualify for a loan with a low interest rate. The majority of home equity loans and cash-out refinances will feature much cheaper interest rates than credit cards and unsecured loans.
➣ You may have access to additional funds. Depending on how much equity you have in your house, you may be able to borrow more than with a credit card or personal loan.
➣ A home equity loan or cash-out refinance can be used for a variety of objectives. You can use a HELOC to undertake home upgrades, consolidate debt, pay for college tuition, or establish an emergency fund.
➣ You may be eligible to deduct the interest on the debt from your income tax return.
There may be a tax deduction for interest paid on home equity funds used for home upgrades.
Disadvantages:
➣ You risk losing your home if you are unable to make payments. In contrast to credit card debt or personal loans, your home serves as collateral for home equity loans and refinancing.
If you cannot make the payments, you face foreclosure or being forced to sell your house.
➣ You lose a portion of a valuable asset. When you borrow against the equity in your house, it can take years to repay the debt and reclaim the value.
If you sell your property while you still owe money on the mortgage, you must use a portion of the profit to repay the loan.
➣ You are in jeopardy of defaulting on your debt. If the value of your home declines, you may owe more on it than it is worth. This is known as being “underwater.”
You would need a source of cash to pay off your equity loan if you had to sell your property while it is underwater.
➣ You will incur closing expenses that will either increase your loan balance or necessitate cash payment. Typically, closing expenses vary from 2 to 5 percent of the loan amount, which can be paid ahead or rolled into the loan.
To recoup these expenses and develop equity, you will need to remain in your house longer.
Finance World Direct > Archived > Mortgages
[wp-stealth-ads rows=”2″ mobile-rows=”2″]