When to Refinance Your Mortgage: Before or After Bankruptcy

When credit card debt, personal loan debt, and other debts become unwieldy and completely overwhelming, sometimes the best solution is to declare bankruptcy. Though this is often a less-than-ideal situation, sometimes it can help a person completely wipe their financial slate clean and have a fresh start in a matter of years.

Belongings with a lot of emotions attached to them are often involved in a bankruptcy, one of which may be your home. If you want to keep your home throughout a bankruptcy, you may be wondering if you should refinance your mortgage for a lower rate before or after bankruptcy. The answer to this question really depends on when your chances of being approved will be better, and what type of bankruptcy you’ll be filing. 

Types of Bankruptcy

To quickly recap, there are two types of bankruptcy, Chapter 7 and Chapter 13. Your ability to refinance will be determined, likely, by which one you file. Chapter 13 will require three to five years, and though it may be easier to refinance with this type of bankruptcy, your request to refinance will need to go through the court system. A Chapter 7 only takes a few months to clean up, but it will make it much harder to refinance.

If You Want to Refinance Before Bankruptcy

Understand that refinancing before you file bankruptcy may or may not be possible. If you have a low credit score or a lot of unsecured debt, refinancing may not be an option. The application process can be extensive, and some lenders are more strict than others with it comes to whether or not they’ll allow you to refinance when you’re on the brink of bankruptcy.

Keep in mind that even if you do refinance, you’ll have to provide proof of what you did with any money you take out of your home’s equity. You may be able to get around this if your state has a bankruptcy exemption, but not all do. That said, it’s a good idea to leave your home equity where it is if you’re about to declare bankruptcy. 

If You Want to Refinance After Bankruptcy

Even if you do want to refinance after declaring bankruptcy, know that this may not be possible for a few years. Some lenders won’t allow a refinancing application until a few years after your bankruptcy was filed. Even then, your application may not be strong enough to get a refinance approval. Even though bankruptcy gets rid of unsecured debt (except student loans) it still makes you look like a risk to a lender and can therefore hurt your refinancing application.

However, keep in mind that all lenders are different and if you’re set on refinancing before or after bankruptcy, it won’t hurt to check with your lender and apply to see what may be possible. But it’s important to remember that if you’ve filed a Chapter 13 bankruptcy, you can’t do so without asking the courts first.

To Refinance or Not Refinance?

At the end of the day, consider where you’re at in the process of filing for bankruptcy and consider whether you’ll be able to refinance later, and whether your application has a chance beforehand. Contact your lender to determine what your options look like and be sure to make the decision that will best benefit your financial situation in the long term. 

Written by John J Scura III, Esq.                                                                                                         
Partner, Scura, Wigfield, Heyer, Stevens & Cammarota, LLP

John has been Certified by The Supreme Court of New Jersey as a Civil Trial Attorney.  Whether it is a personal injury case, bankruptcy case, litigation case or other type of matter, John wants his clients to participate in the decision making process toward solving their problem in the best way possible.

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