Dear Bankruptcy Adviser,
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I was in a Chapter 13 bankruptcy for one year and recently got an offer for my house above the list price. My attorney recommended dismissal of the bankruptcy since I am more than capable of managing my finances now than I was a year ago. Will it be any harder to qualify for a new mortgage with a dismissal rather than a discharge? My debt-to-income ratio will be significantly improved once the mortgages are paid off.
Dear Sam, To first answer your question, a dismissal or discharge should not impact your future buying options. A bankruptcy discharge means all your debts were wiped out or paid in full. A dismissal means you still owe some or all creditors listed in your bankruptcy. Your credit report will reflect those future payments because you are now going to pay those accounts.
Either way, you will need to show future lenders you have established credit post-bankruptcy. One way is to show you have paid all debts owed at the time of filing, and the other way is to establish new credit after the filing.
I thought your question was interesting because you are trying to sell your home while inside an active bankruptcy. Selling the house may not be as easy as you may hope because lenders don't like dealing with homeowners inside an active bankruptcy. The lenders fear violating any bankruptcy laws and prefer to work with you directly, outside the bankruptcy shield. So once the case is closed, after either a dismissal or discharge, you will be able to more easily sell the property.
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If you want to sell the house while inside the bankruptcy, you will have to file a motion with the bankruptcy court to permit the sale. This isn't complicated but may result in additional attorney fees. Your attorney is being very unselfish by saying that it is best to let the case get dismissed and sell the property. This will save you the attorney fees and the delay of obtaining court approval.
Unfortunately, exiting the case via a dismissal could take longer than you'd like. I can't speak for all bankruptcy district trustees, but some can take months to dismiss a case for nonpayment. I have had clients remain in a bankruptcy for more than six months without making a payment to the Chapter 13 trustee before the trustee files a motion to dismiss.
In some cases, the trustee does not just dismiss the case without trying to collect from you. Some trustees will request a wage deduction order from your employer before letting the case get dismissed. This would force you to file a motion to dismiss your case. You need to know how your Chapter 13 trustee handles cases with delinquent payments.
As you can see, you do have a few issues to consider before selling your home or letting the trustee dismiss your case. Make sure your attorney understands whether you need to expedite the sale or whether you can wait a few months.
Copyright 2013, Bankrate Inc.