How to Refinance Your Home During Chapter 13 Bankruptcy

It may be possible for consumers to refinance a mortgage while in Chapter 13 bankruptcy. There are certain rules that must be followed, however.

The Court Will Need to Approve the Refinance

Refinancing an existing mortgage is considered taking on new debt, which is normally not allowed during an active bankruptcy case. To overcome this hurdle, the debtor will need to petition the court to seek permission before obtaining a new loan or loan modification. Only after the judge has approved the debt may the consumer proceed with refinancing his or her loan.

Reasons Why a Debtor Might Want to Refinance During a Chapter 13 Bankruptcy

Filing Chapter 13 can stop the threat of foreclosure. It also forces the mortgage company to accept repayment of past due payments over five years. This can be an ideal time to pursue a refinance or loan modification to reduce monthly mortgage payments. Because bankruptcy can free up funds that can be used to pay off debt, this improves the likelihood of getting approved for a refinance or loan modification.

There may be other good reasons why a debtor would want to refinance a home.

• The original mortgage has a high-interest rate and refinancing would reduce monthly payments
• The original mortgage payment has changed because the adjustable interest rate has gone up and increased the monthly payment
• The original mortgage payment has increased due to increases in real estate taxes
• The current interest rates are much lower than the original loan’s rate, which could result in a lower monthly payment
• It may be possible to obtain a cash-out loan that can be used to pay off debts sooner

Finding a Lender Could Be a Challenge

Finding a lender who is willing to refinance a mortgage when a Chapter 13 is still active can be challenging. A lender could be wary of granting a refinance to someone who has filed bankruptcy. Most lenders require a waiting period of two years after the Chapter 13 has been discharged.

It may be possible for someone in a Chapter 13 to obtain an FHA loan if they are one year into their repayment plan. The borrower will need to have made 12 months of payments to all their creditors. There can be no late payments to any creditors from the time the repayment plan started. A minimum of a 580 credit score is generally required.