Can I Get a HELOC While in Chapter 13?
Navigating a HELOC during Chapter 13 bankruptcy: learn the process, requirements, and financial considerations.
A Home Equity Line of Credit (HELOC) functions as a revolving line of credit, similar to a credit card, secured by your home’s equity. Chapter 13 bankruptcy is a legal process for individuals with regular income to repay debts over three to five years under court supervision. While in Chapter 13, obtaining a HELOC is possible but requires specific steps and court approval.
Understanding the Need for Court Permission
During Chapter 13 bankruptcy, a debtor’s assets and finances fall under court jurisdiction. This oversight ensures the repayment plan’s integrity and protects creditors’ interests. Debtors cannot incur new debt, especially debt secured by real property like a HELOC, without permission from the court or Chapter 13 Trustee.
The bankruptcy trustee oversees your repayment plan and ensures compliance with bankruptcy laws. New borrowing could impact your ability to make existing plan payments, so the court and trustee must review and approve such actions. Obtaining credit without prior approval can lead to serious consequences, including dismissal of your bankruptcy case.
Information for Your Court Request
Before requesting court approval for a HELOC, gather specific information. This includes stating the purpose for the HELOC funds, such as home repairs or medical expenses, rather than general living costs. You must also specify the proposed amount, interest rate, and exact repayment terms, including the monthly payment.
Demonstrating your ability to repay the HELOC without jeopardizing your Chapter 13 plan is important. Provide updated financial information, such as recent pay stubs and an updated Schedule I (income) if your income has changed. Include an amended Schedule J (expenses) showing how the new HELOC payment fits your budget. Information about your home’s current value and any existing liens will also be required.
The Court Approval Process
After gathering information, request court approval through a motion. Your attorney typically files a “Motion to Incur Debt” with the bankruptcy court. This motion outlines the proposed HELOC details and explains its necessity.
Once filed, notice must be provided to the Chapter 13 trustee and all creditors. These parties can review the request and file objections. The court will then schedule a hearing to consider the motion, especially if objections are raised, where you may need to explain the reasons for the new debt. This process can take several weeks.
Lender Requirements and Closing
Even with court approval, you must meet the HELOC lender’s separate requirements. Lenders look for specific criteria when underwriting a HELOC for someone in Chapter 13, assessing the risk. Financial documentation like income verification, recent credit reports, and a property appraisal will be required to evaluate your application.
Lenders consider factors such as your debt-to-income ratio and the amount of equity available in your home, often requiring at least 15-20% equity. While court approval addresses the bankruptcy aspect, the lender’s underwriting process focuses on your ability to repay the new debt and the collateral’s value. The final steps involve the lender’s application, underwriting review, and closing procedures, which can include various fees and costs.
Adjustments to Your Chapter 13 Plan
Obtaining a HELOC while in Chapter 13 will impact your existing repayment plan. The new debt, including its monthly payments, may necessitate a formal modification of your bankruptcy plan. This is because the original plan was structured based on your financial situation at filing, and new obligations can affect your disposable income.
The Chapter 13 trustee will review any proposed changes to ensure the plan remains feasible and aligns with the original plan’s good faith requirements. Your attorney will file a motion to modify the plan with the court, detailing how the new HELOC payments will be incorporated. This modification ensures the added debt does not jeopardize your ability to complete your bankruptcy payments and conclude your Chapter 13 case.