Coming to terms with the realization that declaring personal bankruptcy is the only solution to financial trouble can certainly be devastating. The issue of personal debt as opposed to business debt is often handled through a “Chapter 13” filing. This type of consumer bankruptcy allows debtors to consolidate their outstanding debt. The goal is for them to pay off the entire amount or a sizeable portion of their bills over a three to five year period.
Mortgage debt is often a large part of the equation, which leads many Chapter 13 filers wondering if they can refinance to a lower interest rate and/or alter their terms to make the loan more affordable. This is a very good question, especially since with Chapter 13 bankruptcy, debtors are typically allowed to keep their property and use their income to repay creditors. It stands to reason that if you can reduce your monthly mortgage by refinancing, it will enable you to pay off more of your total debt, right?
It is indeed possible to refinance, even in the shadow of Chapter 13 bankruptcy (with certain lenders). The main requirement is that the homeowner must have had one full year of on time payments towards the consolidated debt total designated by the bankruptcy plan. Nolo, the DIY, online legal service, offers the following steps for bankrupt homeowners who would like to refinance:
- Before you refinance, review your goals for what this action would accomplish. In addition to helping with an existing mortgage it could also produce extra cash for credit card bills, car payments, student loans, or medical bills. It could also generate funds from the equity you’ve accrued within the home already.
- Before attempting approval for a refinancing loan, first discuss the matter with a bankruptcy attorney. That way, you will receive professional, knowledgeable advice regarding the best way to proceed. You may also need permission from the trustee who is overseeing your bankruptcy plan.
- Be aware that not all lenders will be eager to provide you with a refinancing loan while you are in Chapter 13. Nolo suggests GMAC and Lending Tree (note: we’re not 100% sure that LendingTree is offering loans…we always thought that they were a lead aggregator). A loan from the Federal Housing Administration or FHA could be another option. FHA rules may allow for lender to approve an FHA loan for a borrower who is still paying on his or her Chapter 13 Bankruptcy. However, payments must be verified going back at least 12 months. A borrower may also be required to submit a written explanation of the bankruptcy and show satisfactory employment and meet other financial obligations.
- Refinancing your mortgage will not be possible without the approval of your bankruptcy trustee.
- When you have taken care of all of the above-mentioned requirements, the next step will be to apply for the home loan to refinance your current mortgage. It will be necessary to complete all of the required paperwork and disclosure forms. Of course, a thorough review of all of the forms is very important to do before signing any documents. Other steps that must be taken before the refinancing loan will go through are supplying written proof of your bankruptcy payment history, written permission from the trustee, bank statements, tax returns and two recent pay stubs.
Refinancing an existing mortgage can be a vital key to success for those who have declared Chapter 13. If you are interested in refinancing, remember keeping your payments on time for a minimum of one year is a step in the right direction!