Chapter 7 and Chapter 13
A personal bankruptcy in the United States runs under one of two chapters, and the buyout works differently in each.
In a Chapter 7 the debtor’s non-exempt assets are liquidated by a trustee to pay creditors, and the remaining debts are discharged. Real estate with equity above the exemption is at risk: the trustee can sell it. A buyout in Chapter 7 is the debtor, or a family member, paying the trustee the value of the non-exempt equity so the property is kept and the trustee has the money instead of the house.
In a Chapter 13 the debtor keeps the assets and repays creditors through a court-approved plan over three to five years. The plan can be paid off early, or a debtor who can no longer make the payments may need to pay the balance to complete or dismiss the case and keep the property. A buyout in Chapter 13 is a loan that pays the plan balance, or the amount the trustee and the court require, so the case closes.
In both, the property’s equity is the source of the money and a loan against that equity is the tool. Whether that loan exists depends less on the equity than on what the property is.
Consumer purpose versus business purpose
The single most important question in a buyout is the use of the funds and the property behind them. A loan secured by an investment property, made to keep that property in a bankruptcy, is a business purpose loan: no consumer rules, asset-based underwriting, a short-term structure a private lender can write. A loan secured by the home the debtor lives in is a consumer purpose loan, whatever the funds are for: ability-to-repay underwriting, licensing, disclosures and timelines, and the requirement that the borrower’s income supports the payment.
Most bankruptcy buyout requests are the second kind. The property at stake is the family home, the debtor’s income is the reason for the bankruptcy, and the loan that would solve the problem is the loan the rules make hardest to write.
Very few lenders make consumer purpose buyouts
Private lenders are business purpose lenders. Their loans are short, interest-only and asset-based, their capital comes from investors who expect a property-secured return, and none of that survives the consumer rules on a primary residence: a balloon loan on a home is restricted, the ability-to-repay analysis takes weeks and requires income the debtor may not have, and the licensing is different. So the honest answer from most private lenders to a homeowner in bankruptcy is no, not because the equity is insufficient but because the loan type is wrong.
On investment property the picture changes. Loan Goat’s bridge program takes bailouts, defaults and notices of default and matured loans on non-owner occupied SFR, condo or townhome and 2-4 unit property, on terms of one or two years, LTV up to 75%, loans from $150,000 to $25,000,000 and rates from 9.00% to 13.00%, with a 650 minimum score and a close in as quickly as 3 days on a clean file. Whether a specific buyout fits is confirmed per file, with the court’s order as part of the file.
The paths that work
Investment property: a business purpose bridge
The debtor’s attorney obtains the court’s authorisation, the lender underwrites the rental on its value, equity and exit, the loan pays the trustee or the plan, the case closes and the property is refinanced into a term loan once the discharge or dismissal is recorded and the borrower’s credit recovers. Second lien structures, where a first mortgage on the rental is worth keeping, are described on the second and third mortgages program and in the business purpose second mortgages guide; whether a second is available on a specific file is confirmed per deal.
Primary residence: community banks, credit unions and non-QM
For the home, the realistic sources are local institutions that keep loans on their books and can underwrite a recovering borrower with judgment, non-QM lenders with programs for borrowers shortly after a bankruptcy, and, where a family member has the means, a private loan from someone who loves the debtor. Each requires the court’s order and income the borrower can document. The consumer purpose second mortgages guide explains why most hard money lenders will not write the loan and what the alternatives look like.
Sale
When neither path is open, selling the property inside the bankruptcy, with the court’s approval, keeps the equity in the debtor’s hands rather than the trustee’s. It is not a buyout, but it is often the outcome that protects the most value.
What the file needs
- The petition, the schedules and the current plan or the trustee’s demand, so the payoff amount and the deadline are exact.
- The motion and the court’s order authorising the loan, or the attorney’s timeline for obtaining them.
- The property: address, occupancy, the existing loans and their status, an estimate of value, and, for a rental, the lease.
- The exit: the refinance or the sale that repays the bridge once the case closes, with the evidence behind it.
- For a business purpose loan, the borrower’s entity documents and proof of any funds needed at closing.
Rates and pricing on any published program are subject to change without notice and are not a commitment to lend; the pricing guide explains the general factors.
Where bankruptcy buyouts fit at Loan Goat
- Bridge loans for the hard money residential bridge that publishes bailouts OK on investment property.
- Second and third mortgages for the junior lien structure on a rental with a first worth keeping.
- Multi-family hard money loans when the property in the estate is an apartment building.
- Cash offers only for the sale path, where the buyer needs to perform like cash on a court timeline.
A bankruptcy buyout is decided by the property before the equity: an investment property has a lender, a home has a harder road. Knowing which one you are on before the motion is filed is what makes the deadline manageable.
