Chapter 11 Bankruptcy Guidelines for Government and Conventional Loans
What does it take to get a mortgage after Chapter 11 bankruptcy?
It’s very possible to get a mortgage after filing Chapter 11.
- To get a government-backed mortgage after a Chapter 11 bankruptcy, you must make at least 12 on-time monthly payments into the plan and get approval form the bankruptcy judge.
- For conforming (Fannie Mae and Freddie Mac) loans, the waiting period is two years after discharge.
- Non-QM or non-prime loans may require no waiting period at all.
- Your debt-to-income ratio, credit score and history, down payment and assets must also meet the guidelines of the loan program you choose.
Qualifying for a Mortgage After Bankruptcy
Chapter 11 bankruptcy is another option for consumers who may not be eligible for Chapter 7 or Chapter 13 bankruptcy. Chapter 11 bankruptcy is more common for businesses. However, individuals can file Chapter 11 bankruptcy on a personal level.
What Is the Chapter 11 Repayment Plan?
In general, Chapter 11 is a debt reorganization program for businesses and individuals with extensive real estate investments and/or large amounts of unsecured debt.
Chapter 11 is less common than Chapter 7 and 13 bankruptcy and more time-consuming.
Businesses who want to keep operating but need time to reorganize their debts use Chapter 11 bankruptcy to get back to profitability. You can file Chapter 11 bankruptcy voluntarily In US.Bankruptcy Court, you can file Chapter 11 voluntarily. However, three or more creditors working together can also force a business into Chapter 11.
Once you file, creditors must temporarily stop collection actions against you. You get four months to come up with a restructuring plan. If you need more time, the court can grant up to an 18-month extension. After this period expires, your creditors can propose their own restructuring plan to the court.
The restructuring plan directs the way you will run your business and specifies an amount that you’ll pay your creditors. Common restructuring plans include consolidation, downsizing, and liquidation of certain assets.
Once you file for Chapter 11 bankruptcy, the creditors have a right to either accept and/or contest your petition. Most creditors are willing to accept a Chapter 11 petition because they usually get more than they would with a Chapter 7 liquidation bankruptcy.
There are three types of bankruptcy creditors:
- Priority creditors
- Secured creditors
- Unsecured creditors
Priority debts include employee wages, alimony and child support obligations and taxes. These things are not generally dischargeable in bankruptcy.
Secured debts are loans backed by assets. In Chapter 11, you may ask for court approval to pay the current value of the property as opposed to what you actually owe.
If creditors won’t approve your petition, you can ask the judge for a “cramdown.” That means asking the judge force your creditors to accept your proposal. It’s called a “cram down” because you are asking the judge to cram the terms of the plan down the non-accepting creditor’s throat.
While Chapter 13 repayment plans are normally 60 months, Chapter 11 repayment times are open. However, most Chapter 11 repayment plans do not exceed 24 months.
The filing costs and fees for Chapter 11 are substantially more than Chapter 7 and 13. Just for filing fees on Chapter 11 is $1,717. You then add attorney fees which will range from a few thousand to millions of dollars for large businesses.
Chapter 11 for Real Estate Investors
Chapter 11 is a powerful tool because you can use it to restructure your mortgages. For example, if you own a property worth $100,000 but you owe $200,000 on the loan. Filing Chapter 11 allows you to reduce the principle balance of the mortgage from $200,000 to $100,000.
Chapter 11 can also allow you to reduce the interest rate and extend the term of repayment to another 360 months (30 years). This reduces your monthly mortgage payment.
Choosing Chapter 11 Personal Bankruptcy
Here are the main reasons consumers choose Chapter 11 versus Chapter 7 and/or 13 bankruptcy:
- Filers can use their income to repay some or all of their obligations while enjoying protection from collections efforts and lawsuits.
- Chapter 11 benefits consumers who have too much unsecured debt (more than the $419,275 allowed for Chapter 13 bankruptcy).
- Chapter 11 helps real estate investor restructure their mortgages and become profitable again.
A Chapter 11 Bankruptcy can be the best choice for high earners who have large real estate assets or unsecured debts.
Chapter 11 vs Chapter 13
Both Chapter 11 and Chapter 13 Bankruptcy are federal restructuring debt repayment programs.
With Chapter 13 bankruptcy, consumer secured debts cannot exceed $1,184,200. Unsecured debts cannot exceed $419,275 to qualify for Chapter 13 bankruptcy.
A trustee is always appointed in Chapter 13 repayment plans, unlike Chapter 11. The role of the trustee is to review and propose a repayment plan and collects the payments and pays the creditors. The trustee has the power to dismiss and/or convert Chapter 13 to Chapter 7 bankruptcy. The trustee reports directly to the bankruptcy court judge.
The list of creditors does not have the right to vote on the restructuring plan like they do with Chapter 11.
The repayment period ranges from 36 to 60 months. Once you have made your payments on time for the required period, any remaining debts are discharged and wiped out.
Mortgage Waiting Periods After Chapter 11
For most programs, waiting periods following Chapter 11 and Chapter 13 are the same.
- FHA allows mortgage eligibility after 12 months of on-time payments if the bankruptcy judge approves, and no waiting period after discharge.
- VA home loans are allowed after 12 months of on-time payments and trustee /judge approval with no waiting period after discharge.
- Conforming (Fannie Mae and Freddie Mac) lenders require a two-year waiting period after Chapter 11 discharge, and a four-year wait after Chapter 11 dismissal.
Mortgage applications after recent bankruptcy filings may require manual underwriting, which can be stricter than automated underwriting.
Non-QM loans are not standard. Many non-prime lenders have no waiting periods following bankruptcy.
Qualifying for a Mortgage After Bankruptcy
Gustan Cho Associates are experts in helping borrowers after bankruptcy qualify for a mortgage. In addition, Cho Associates has no lender overlays for government and conventional loans. (Lender overlays are additional requirements that many lenders payer on top of program guidelines. They make it harder to qualify. )
Over 75% of our borrowers are folks who could not qualify with other lenders.
For more information about qualifying for a mortgage with a mortgage company with no lender overlays, please contact us at Gustan Cho Associates at 262-716-8151 or text us for a faster response. Or email us at [email protected] We have a national reputation of being a one-stop mortgage shop and being able to do loans other lenders cannot.
Not only do we specialize in government and conventional loans with no lender overlays but we have dozens of non-QM and alternative financing loan programs on owner occupant, second homes, and investment property mortgages.
Some of our most popular non-QM loan programs include:
- Mortgages one day out of bankruptcy
- Bank statement mortgages
- Asset-depletion loans
- P & L non-doc stated income loans
- Fix and flip loans for real estate investors
- Other alternative loan programs.
The team at Gustan Cho Associates is available 7 days a week, evenings, weekends, and holidays.