When and How to Apply for a HELOC After Chapter 13?

Getting back to normal after a Chapter 13 bankruptcy can be a significant milestone on your path to financial recovery. On top of it getting loans post-bankruptcy requires careful consideration and strategic planning.

Today's blog is all about providing insights into when and how you can apply for a HELOC after Chapter 13. Stick around to find your way into a successful HELOC application.

Understanding Chapter 13 Bankruptcy

Chapter 13 bankruptcy, often referred to as a "wage earner's plan," is a legal process that allows individuals with regular income to restructure their debts and create a manageable repayment plan. 

Unlike Chapter 7 bankruptcy, which involves liquidating assets to pay off debts, Chapter 13 offers individuals the opportunity to retain their assets while making structured payments over a period of three years.

Can I Get a Home Loan After Bankruptcy? 

Absolutely! You can still get a home loan after bankruptcy.

• If you went through Chapter 13 bankruptcy, you might qualify for a home loan after making 12 on-time payments as part of your bankruptcy plan. 

• Sometimes, you might even be eligible for a home loan one day after your bankruptcy ends. But there is just one thing you need to consider, and that is your credit report. 

• So, you can start by fixing your credit report, getting a secured credit card, and filing your taxes on time.

These small steps can help show lenders that you're responsible for your finances, making it more likely for you to get approved for a home loan after Chapter 13 Bankruptcy.

How To Rebuild Credit After Chapter 13?

This is a priority! It provides you with an opportunity to start fresh and take proactive steps to improve your creditworthiness. Let’s see how you can do that now!

1. 1. Keep Track Of Your Payments

If you have existing credit cards or loans, you need to focus on making timely payments. This shows that you're responsible with money and helps boost your credit score.

2. 2. Get A New Credit Card Or Loan

Getting a new credit card or loan and paying it on time can help boost your credit score. But be careful when you apply for these, the lender will do a hard inquiry, which can lower your score a bit. It's better to apply for credit lines for which you think you have a higher chance of qualifying.

3. 3. Look For A Cosigner

Applying for a loan with a co-signer means getting someone with good credit to vouch for you. This makes lenders more likely to approve your loan because they also consider the co-signer's credit history. 

But remember, when someone cosigns a loan, they're not getting the money themselves instead, they're promising to pay it back if you can't.

So you have to be extra responsible while applying for a HELOC with a cosigner. 

4. 4. Don’t Switch Jobs Frequently

When you're applying for a loan, lenders like to see that you've had a steady job and a regular income. This makes them more confident that you'll be able to pay back what you borrow. 

Switching jobs can worry your lenders and raise doubts about your ability to repay what you owe.

It might be a bit overwhelming while you’re just starting out, but it will get better if you’re determined to get your credit scores on track.

HELOC After Bankruptcy: How Long Will It Take? 

The timeline is influenced by how soon you rebuild your credit and become eligible to apply for a HELOC. By default, after chapter 13, you'll probably have to wait 2 to 7 years before you can get a HELOC.

But, keep in mind that the repayment of HELOC after a Chapter 13 bankruptcy takes longer than Chapter 7 and it is also approved by a bankruptcy court. 

5 Steps To Apply For A HELOC After Chapter 13 

The application process is similar to a regular HELOC application but with a few extra steps.

1. 1. Work On Rebuilding Your Credit

You just got to know how you can rebuild your credit! Start doing it during your waiting period. Research and get your secured credit card. Now, all you have to do is manage your credit card payments responsibly, and stay away from unwanted credit purchases. 

2. 2. Get Your Pre-Approval

After you’re done with your waiting period, go ahead and apply for your pre-approval. To do that, get your income documents ready (W-2, paystubs, or bank statements)

With a pre-approval, you will get an idea of how much your lender will approve. So, it will be easier for you to plan your HELOC spending accordingly. 

3. 3. Talk About Your Bankruptcy Situation

Address the Chapter 13 bankruptcy upfront by writing a letter of explanation. In this letter, explain why you filed for bankruptcy, including any events like job loss, medical issues, or divorce that affected your finances.

Additionally, highlight any positive changes in your financial situation since the bankruptcy, such as increased income, paying off debts, and a better repayment record.

Include this letter when you apply for pre-approval. Be honest, take responsibility for the past, and reassure the lender about your future financial stability.

4. 4. Have Proactive Communication With Lenders

When lenders review your application, they might have questions, especially considering your history. They might ask about credit inquiries, especially if you've been applying for many loans or credit cards.

5. 5. Prepare Your Documentation And Apply

Finally, gather all the documents and apply. Once your lender reviews your application, they will send a home appraiser and an underwriting executive to determine the value of your home. 

After appraisal and underwriting, you will be requested to confirm and sign your documents to close the HELOC application.

Best Practices for Managing a HELOC Responsibly 

Managing a HELOC requires responsible financial behavior to avoid potential pitfalls and maximize its benefits. Here are some best practices you can follow to manage a HELOC:

• Borrow only what you need as this can lead to financial strain down the road.

• Familiarize yourself with the terms of your HELOC and develop a repayment plan to pay off the borrowed funds. 

• Monitor your spending and review your HELOC account statements to ensure accuracy and identify any unauthorized transactions or errors. 

Remember that responsible borrowing and financial management are key to maximizing the value of your home equity after Chapter 13 bankruptcy. Consider seeking advice from the best home equity loan companies to ensure you're on the right track.