Bankruptcy Equity Home Loan

Often those consumers who file for bankruptcy find that there is equity in their real estate, which simply means that the value of their house is greater than the balance that they owe on their mortgage bond. Should this be the case, the consumers involved – who will be known as “debtors” after they have filed for bankruptcy – will have the option of obtaining a bankruptcy equity home loan.

Exactly how much money a debtor will be able to obtain from a bankruptcy equity home loan will depend on two factors: how much the house has been valued at and how much is owing on the mortgage. As the homeowner has filed for bankruptcy, though, his bank may not wish to extend his credit to the limit or extend his credit at all. The homeowner would then have the option of approaching another bank to both refinance the existing loan and increase it to the full extent of the house’s value. It is not always a given that a bank would be willing to refinance or provide further financing, and it can sometimes be difficult for a debtor to obtain a bankruptcy equity home loan.

Should a debtor be able to obtain such a loan, however, the funds can be used to repay all or some of his creditors – under the guidance of his estate’s court-appointed trustee – and exactly how the funds will be applied depends on whether the debtor has filed under Chapter 7 or Chapter 13 of the Bankruptcy Code. Should a debtor have filed under Chapter 7, the trustee is under an obligation to investigate the debtor’s assets to determine whether selling any of them would be in the interests of creditors. The Chapter 7 trustee will, without doubt, realize there is equity in the debtor’s real estate and will then place a value on it and request that the debtor pay that value into his estate. The funds obtained by the debtor from the equity home loan will then be used to “pay” the trustee for the equity, and the trustee will then distribute these funds to creditors after the deduction of all relevant costs.

Should a debtor have filed under Chapter 13, there is an assumption that he has sufficient disposable income to settle all or most of his creditors’ claims over the next three to five years. In this case, taking out a bankruptcy equity home loan will ensure that he will indeed have the cash he needs to make the necessary payments to his Chapter 13 trustee.

As most debtors file for bankruptcy because they find themselves in insoluble financial predicaments, banks are not always willing to fund bankruptcy equity home loans. As such, a consumer should perhaps discuss the possibility of obtaining such a loan / refinancing with his bank before filing for bankruptcy so that he is not placed in an even worse situation after filing should the bank refuse to grant the loan or refuse to refinance.