Bankruptcy Buyout
Hard Money Loans

If you’re in a Chapter 13 consumer bankruptcy and looking for a way to refinance out of your plan using a bankruptcy buyout hard money loan, this article will be helpful, informative – and probably disappointing. At First Capital Trust Deeds (FCTD), we’re a mortgage brokerage that specializes in hard money lending, and we receive numerous calls about bankruptcy buyouts. My hope is to save you time and redirect you down a better path.

FCTD does not provide consumer bankruptcy buyout loans for Chapter 7 or 13 BKs. Please read the entire page to understand the difference between consumer purpose and business purpose loans and why it's next to impossible to use a hard money loan to pay off a personal bankruptcy. 

Two Types of Consumer Bankruptcy Chapters: 7 and 13

There are two main types of consumer bankruptcies in the United States: Chapter 7 bankruptcy and Chapter 13 bankruptcy.

Chapter 7 Bankruptcy

Chapter 7 bankruptcy is sometimes referred to as a "liquidation" bankruptcy, because it involves liquidating (selling off) assets to pay debts. In this type of bankruptcy, a debtor's non-exempt assets are sold to pay off as much debt as possible, with any remaining debt typically discharged (forgiven). Chapter 7 bankruptcy is typically used by individuals with significant debt and little to no income.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy is sometimes referred to as a "reorganization" bankruptcy, because it involves creating a repayment plan to pay off debt over a period of three to five years. In this type of bankruptcy, the debtor keeps their assets (real estate, automobiles, etc.) and agrees to make regular payments to creditors according to a court-approved plan. This type of bankruptcy is typically used by individuals who do have regular income and the ability to make payments – but just need help catching up on past-due debts. It’s this group, Chapter 13 bankruptcy filers, who often seek out hard money loans.

Hard Money Loans: Consumer Purpose Versus Business Purpose

Hard money loans fall into two categories: consumer purpose and business purpose.

Consumer Purpose Hard Money Loans

A consumer purpose loan is where funds are intended for personal use, including:

• Primary residences
• Second homes
• Home improvement – primary and second homes
• Debt consolidation – personal debts (credit cards, auto loans, installment loans, etc.)
• Personal income taxes
• College tuition
• Weddings
• Divorce settlements
• Splitting inheritance proceeds
• Personal judgments
• Making bail
• Chapter 13 bankruptcy buyouts

Hard money loans aren’t intended to be used for consumer purposes.

Business Purpose Hard Money Loans

Hard money loans are, as the name suggests, intended for business purposes. These include:

• Investment properties: purchase or refinance
• Owner-occupied commercial property loans
• Construction loans for home builders or developers
• Fix & flip loans
• Purchasing businesses
• Cash-outs against primary residences with proceeds for a specific business purpose
• Investment property renovations
• Business debt consolidation
• Business taxes
• Business partner buyouts
• Business judgments and settlements
• Chapter 11 business bankruptcy buyouts
• Business litigation loans

The focus of hard money lending is business purpose loans. To put it simply, a Chapter 13 personal bankruptcy is consumer-purpose, and therefore not in the right category to be a bankruptcy solution.

Very Few Hard Money Lenders Do Consumer Purpose Loans

I go back and forth between saying “9 out of 10” or as much as “99% of hard money lenders only provide business purpose loans.” Another way of saying this is “1 out of 10” or as few as “1 out of 100 hard money lenders provide consumer purpose loans.”

Out of that “1 out of 10” or “1 out of 100,” perhaps only 10% of that already small group will do a consumer bankruptcy buyout hard money loan.

Note: There’s no hard data available on this – just my estimate from operating a hard money brokerage originating 500+ hard money loans each year. I talk to a lot of people and it’s nearly all business purpose lending.

Few of the remaining lenders will fund this type of loan because they’re a lot of work. It takes a long time to work through the court and trustee to get approval and close the loan.

I spoke to a fund manager a little while back who said he tried a bankruptcy buyout once, but it became a headache that dragged on for months. He set money aside for four months to fund the loan but wound up pulling the offer.

Another reason hard money lenders avoid bankruptcy buyout loans is that they have to be 20 to 30 years long to comply with consumer lending laws. Hard money lenders usually do 12-month bridge loans, turning over their money once or twice a year. A 20- or 30-year loan is a very long-term lending relationship. They may not even be in business by then.

Community Banks and Credit Unions For Bankruptcy Buyout Financing

A better place to look for a Chapter 13 bankruptcy buyout loan is through a community bank or credit union. They provide home loans and home equity lines of credit to their members, and might even have to reach certain lending goals to stay compliant with fair housing regulations.

A friend of mine filed Chapter 13 bankruptcy after falling behind on payments while undergoing cancer treatment. They recently paid off their Chapter 13 bankruptcy with a new mortgage through a community bank. It would have been next to impossible to find a hard money lender to do this loan, but a community bank made it happen and allowed them to exit bankruptcy.

Conclusion

Chapter 13 consumer bankruptcy buyout hard money loans are incredibly rare. Hard money loans are intended for business purposes: real estate investors or professionals whose business is real estate, such as developers, home builders, landlords, or house flippers. There are so few hard money lenders that would touch a consumer purpose loan. And out of that group, an infinitesimal few provide consumer bankruptcy buyout financing. A much better use of time and energy is to inquire with a community bank or credit union for options to pay off the bankruptcy balance.