Interestingly enough, and fair or not, lenders view a Chapter 13 and Chapter 7 almost the very same when it comes to determining creditworthiness. With the exception of most sub prime mortgage loans, lenders look at the actual discharge date of a bankruptcy when deciding whether or not they want to issue a loan for a potential homeowner.

For instance, a conventional mortgage asks that a bankruptcy be discharged for four years before being able to qualify for a new conventional mortgage. And not the filing date, the discharge date. If a person files for Chapter 7, the clock begins ticking immediately upon discharge.

But with a Chapter 13, where the borrower makes a good faith attempt to not simply wipe the creditor slate clean and start all over, but establishes a repayment plan to pay everyone off, the clock doesn't start ticking for these folks until the Chapter 13 is completely discharged. That means everyone included in the Chapter 13 filing has been paid off as agreed, typically over a 3 to 5 year period.

A consumer can file for Chapter 13, pay it off over five years, and then have it discharged. If the consumer then wants a conventional Fannie Mae or Freddie Mac mortgage, she must wait for that four year period to pass. Five years in Chapter 13 and four years waiting period equals nine years. That's a lot of time, folks.

So which is better, a Chapter 13 or a Chapter 7? I'm not telling and I really don't know, it's just the nature of the lending guidelines. Is the person filing for Chapter 13 actually being penalized? Maybe, maybe not. But that's the rule alright, four years from the discharge, not the filing date.

Bankruptcy laws changed last year. People used to have a choice as to which would be better for them, a 13 or 7. Now the consumers must pass a litmus test to see if they can even qualify for a 7. That litmus test is made up of a lot of things, but most importantly requires that the consumer make no more than the median income for their area. I live in Austin and I think the median income is somewhere around $49,000 and change.

If you make above that, you go Chapter 13. For your credit to begin repairing itself, the bankruptcy needs to be discharged. Yet most Chapter 13 repayment plans last longer than a couple of years.

However, there are "niche" mortgage programs called "Chapter 13 Buyout" plans that refinance the consumer's home, pay off the Chapter 13 balance and live happily ever after. At least from a bankruptcy discharge date.

Not every lender offers such programs, and there are some very strict rules to qualify for them, primarily the consumer must prove he has not been late on either his mortgage payment or his Chapter 13 payments for the previous 12 month period. If the consumer can show that, then, given sufficient equity in their home, they can get themselves out of the Chapter 13 sooner than their scheduled repayment plan, repairing their credit more quickly.

Bankruptcy is not fun, and bankruptcy protection rules that were changed last year make it more difficult to get started again. But if you're one of those few who are in a Chapter 13 and want out of it, a Chapter 13 Bailout just might be your ticket. You pay everyone off as you had planned, you do it quicker, and you begin repairing your credit sooner.

Published: January 15, 2008

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, a veteran Mortgage Banker, successful Real Estate Consultant and author of Your Guide to VA Loans, Mortgages 101: Quick Answers to Over 250 Critical Questions About Your Home Loan, Who Says You Can't Buy a Home!, and Mortgage Confidential: What You Need to Know That Your Lender Won't Tell You, is a former columnist and Contributing Editor with San Diego-based Mortgage Originator Magazine. Reed is President of CD Reed Mortgage Bankers, Austin, TX and is a Past President of the Austin Mortgage Bankers Association.