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HELOC During Active Chapter 13 Bankruptcy Repayment
I’m reaching out to see what financing options may be available to me while I am currently in an active, confirmed Chapter 13 bankruptcy in Georgia.
I currently own my home in Augusta, Georgia. My existing mortgage is an FHA 30-year loan with:
Current balance: approximately $220,695
Interest rate: 3.75%
Monthly payment: approximately $1,757
Estimated home value: approximately $305,000–$307,000I am looking to access approximately $20,000–$25,000 of my home equity.
My strong preference is to keep my existing 3.75% first mortgage and obtain a second-lien product, such as a fixed-rate home-equity loan, second mortgage, or HELOC, if your company has an option available for borrowers who are currently in Chapter 13.
My bankruptcy attorney has also confirmed that, under the applicable local bankruptcy rule in my case, trustee or court approval is not required before incurring new debt after confirmation, although the new debt would need to be reported to the court afterward.
Could you please let me know:
- Whether you offer a home-equity loan, HELOC, or second mortgage for someone currently in an active Chapter 13;
- If not, what other equity-access options you offer without requiring Chapter 13 discharge;
- Your minimum credit score, equity/CLTV requirements, and Chapter 13 payment-history requirements; and
- Whether you can initially review my situation without a hard credit inquiry.
I am specifically trying to avoid refinancing my entire first mortgage unless necessary because of my current 3.75% interest rate.
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1 Reply
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Obtaining a Home Equity Line of Credit During an Active Chapter 13 Bankruptcy.
Can you access home equity before your bankruptcy is discharged?
Can a homeowner obtain a HELOC during an active Chapter 13 bankruptcy?
Securing a HELOC while navigating an active Chapter 13 repayment plan is possible, though it often feels like an uphill climb. While no federal law stands in your way, you will need the green light from your bankruptcy trustee or court, enough home equity, steady income, and a lender open to working with borrowers in bankruptcy.
The biggest hurdle is finding a HELOC lender willing to take a chance on applicants still in the midst of a Chapter 13 repayment plan.
According to the U.S. Courts, Chapter 13 debtors should not incur additional debt without first consulting their trustee, as new obligations may jeopardize the repayment plan.
Challenges Associated with Obtaining a HELOC During Chapter 13 Bankruptcy
A HELOC lets homeowners tap into their equity without the hassle of refinancing their main mortgage. Yet, Chapter 13 bankruptcy adds extra hoops to jump through that you will not find in a typical HELOC application. In most cases, you must get approval before taking on any major new debt.
Depending on the bankruptcy district and individual circumstances, a debtor may need the trustee’s consent, a formal motion to incur new debt, or a court order.
Approval is far from certain. The trustee or judge will weigh whether the loan is truly needed, how you plan to use the funds, and whether you can keep up with your Chapter 13 payments.
HELOC Lender Restrictions Related to Bankruptcy
Even if you clear the hurdle of bankruptcy court approval, lenders can still slam the door on your HELOC application.
Most traditional banks and credit unions have strict policies that shut out anyone still working through a Chapter 13 bankruptcy.
A few portfolio or specialized non-QM lenders might make exceptions, but even with court approval, there is no guarantee you will qualify for a mortgage.
You will also need enough equity in your home to support the new second lien.
For Example, Consider the Following Hypothetical Scenario:
- Property value: $450,000
- Existing first mortgage: $250,000
- Available equity: $200,000
- Proposed HELOC: $50,000
- Combined loan-to-value ratio after the HELOC: approximately 66.7%
- Even if you have plenty of equity, lenders will still scrutinize your bankruptcy status, credit history, income, ability to repay, and the specifics of your property.
Ability to Repay:
- Lenders will dig into your monthly income, current mortgage, Chapter 13 payments, other debts, and what the new HELOC payment would add to your plate.
- Even if you are sitting on a mountain of equity, your application can still be denied if your income falls short of covering the extra debt.
- Are there any HELOC lenders that waive the extra restrictions for those in an active Chapter 13?
- This is a key question.
FHA and VA loan programs include provisions that allow some borrowers to obtain purchase or refinance loans during an active Chapter 13 repayment plan if eligibility requirements are met. However, these rules do not automatically apply to HELOCs and are subject to each lender’s specific requirements.
You might find options with portfolio banks, specialized home equity lenders, or non-QM lenders. Still, never assume they will welcome active Chapter 13 borrowers. Always double-check the latest lending requirements.
Recommended Steps Before Applying for a HELOC:
Before you spend a dime on applications or appraisals, have your bankruptcy attorney and a mortgage professional review your plan or appraisals. Your bankruptcy attorney can pinpoint exactly what authorization you need in your district, since some local rules call for a court order for certain real estate loans.
United States Bankruptcy Court
If a lender shows interest, get the preliminary loan terms in writing so your attorney and trustee can review them before you move forward. Remember, your property will be the collateral for this loan.
Is it Possible to Obtain a HELOC Following a Chapter 13 Discharge?
Once you have completed your Chapter 13 discharge, more financing doors may open, but a HELOC is still not a sure thing. Some lenders make you wait after discharge, while others use their own rules to judge your credit, equity, income, and financial health.
If you need cash right away, you might consider a fixed-rate home equity loan, a cash-out refinance, or simply waiting until you qualify.
Chapter 13 bankruptcy does not slam the door on HELOCs, but the need for approval and strict requirements make it a tough road. Even if you qualify for a Chapter 13 FHA or VA mortgage, that does not mean you will be approved for a stand-alone HELOC. Talking to a qualified professional can help you map out your options, find lenders who might work with you, and clear up what you need to qualify.
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