You can file for Chapter 13 bankruptcy when buying a house, but it is an unlikely scenario. People file for Chapter 13 to reorganize excessive debt through a court-ordered payment plan lasting three to five years. Excessive debt makes most people ineligible for mortgage loans, making it virtually impossible to buy a house on credit while filing for Chapter 13 bankruptcy. The only other method of buying a house is to pay cash, but the federal bankruptcy court is unlikely to allow that once the debtor files for Chapter 13.
Considerations
Chapter 13 and all other bankruptcy types require debtors to list all assets and debts. Assets include cash available to purchase a home. Bankruptcy exemptions, which vary by the state, allow debtors to keep some cash in certain situations. The bankruptcy court is serious about debtors listing all of their assets. Failing to report cash while using the money to secretly purchase a home could result in allegations of fraud. Fines and prison time are possible for some instances of bankruptcy fraud. At a minimum, the bankruptcy court may dismiss the Chapter 13 bankruptcy case if the court discovers the debtor has hidden assets.
Legal Advice
A debtor wanting to buy a house while filing for Chapter 13 should consult with a reputable bankruptcy attorney for legal guidance. The attorney is likely to advise buying the house well before the bankruptcy filing. Doing so eliminates any possibility of fraud charges. However, buying the house before the bankruptcy also requires the debtor to have credit scores suitable for a mortgage loan, or available cash.
Counseling
Debtors thinking of buying a house and filing for bankruptcy at the same time could also benefit from financial counseling from a nonprofit credit counselor. A counselor may advise forgetting about buying a house until the debtor's financial situation greatly improves. The counselor may suggest paying down debt instead to avoid bankruptcy. Some people lose homes to bankruptcy in Chapter 13 if they cannot make the payments. Also, bankruptcy information remains on credit reports for 10 years.
Alternatives
Debt settlement and debt management plans are alternatives to bankruptcy and could help a person eliminate debt to later purchase a home. Debt settlement resolves credit card and other unsecured debt by allowing the debtor to pay less than the full balance. Debt management allows a counseling agency to manage a debtor's unsecured debts through negotiated payment plans with lenders. Charitable organizations such as the United Way and Salvation Army can recommend nonprofit credit counselors.
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