Cash Out Refinance After Chapter 13

If you’re a homeowner who is eyeing a discharge date to bankruptcy, you may wonder if you’re eligible to refinance your mortgage. The good news is that applying for a refinance likely holds the same restrictions as applying for a brand new mortgage, depending on your circumstance.

But let’s look beyond the minutiae for a minute so you can understand this — if you’re in bankruptcy or emerging from bankruptcy, you are not alone. According to Lending Tree, more than 700,000 people in the United States went through personal bankruptcy in 2018. And MarketWatch says there were 452,797 bankruptcy filings in the first seven months of 2019.

Many people assume when they hit the point of bankruptcy, their credit is beyond repair, and so are any possible changes to home mortgage loans.

The good news, experts say, is that refinancing is possible after bankruptcy. Not only that, but you don’t need to consider Chapter 13 a permanent black stain on your credit that will push you out of any possible savings that may come with refinancing your home.

What is Chapter 13 Bankruptcy?

You may be familiar with Chapter 11 bankruptcy, which is often referenced in the news when companies restructure. That’s because Chapter 11 bankruptcy is a reorganization plan used by large businesses to help them stay afloat while repaying their debts.

According to the U.S. Courts, a Chapter 13 bankruptcy (also known or commonly referred to as a “wage earner’s plan”) offers an individual with regular income a way to repay all or part of his or her debts.

Under a Chapter 13 bankruptcy:

– A payment plan is structured so monies owed can be paid in installments to creditors.

– Commonly, the structure of the repayment is three or five years.

– Is based on the debtor’s monthly income.

– Cannot provide for payments over a period of more than five years.

– Protects debtors from collection agencies during the repayment period (based on 11 U.S.C. § 1322(d)).

Chapter 13 Eligibility and Benefits

If you’re struggling to pay your bills, especially your mortgage, you can’t just wake up tomorrow and decide to file for Chapter 13. Instead, there are a number of basic criteria that will determine your eligibility to file.

According to debt.org, you can’t have more than $394,725 in unsecured debt, including things like credit card bills or personal loans. You also can’t have more than $1,184,200 in secured debts, such as car loans or mortgages.

While the above amounts are adjusted periodically, there are other requirements that need to be met. For instance, an individual cannot file for Chapter 13 bankruptcy if they’ve failed to appear before a court or comply with orders regarding a prior bankruptcy petition over the previous six months (or 180 days). Additionally, a debtor cannot meet Chapter 13 guidelines unless or until he or she has received credit counseling from an approved agency within the same six month period before filing.

The biggest benefit to a Chapter 13 bankruptcy is that it allows a homeowner the means to stop any effort being made to foreclose on the property. That means it automatically suspends any current foreclosure proceedings, buying a homeowner time in the process. While this doesn’t eliminate debt, it can possibly free up enough income to resume normal mortgage payments and keep the house. 

The Rules to Refinance After Bankruptcy

We said it before and we’ll say it again — a refinance after bankruptcy is not impossible. Yes, you might have a more difficult time getting approval to refinance and there are restrictions depending on when the bankruptcy was filed. But you can find your financial footing and still be approved.

Going forward, put yourself in the mindset that lenders will need need to see that you have your finances under control. From that point, you can improve your chances of being approved for a refinance by offering proof of your income and gathering all necessary documentation to prove you’ve been paying debts on time.

According to Rocket Mortgage and various financial publishers, you can qualify for a refinance:

– The next business day (or a waiting period as little as one day) after your Chapter 13 bankruptcy discharge date if you have a government-backed VA loan.

– You’ve observed the two-year waiting period if you hold a conventional loan.

– You’ve observed a one-year waiting period if you hold an FHA loan, but the lender must have verification that you’ve made all bankruptcy payments on time for a 12-month (one year) period.

Keep in mind that if you hold a conventional loan, the waiting period can be different depending on whether your bankruptcy case was discharged or dismissed. In the latter, you may have to wait up to four years to refinance (though you may qualify in as little as two years). In the former, the waiting period might be shortened to as little as two years, regardless of circumstance.

What to Know About Cash-Out Refinance After Bankruptcy

Make no mistake — the first thing you should do when you decide to refinance after bankruptcy is to do your homework and learn about your options. It’s not just the restrictions we’ve already mentioned that might apply to your situation, but you also have to think about the type of loan you want going forward. If your answer is a cash-out refinance, it’s important to know the ins and outs so you can plan ahead and present the strongest application.

Simply put, a cash-out refinance means that you’re replacing your old mortgage loan with a new mortgage loan for a larger amount and walking away with the difference after closing. Homeowners do this so they can take equity they’ve built up in the home and turn it into cash. Unfortunately, some lenders may look at this type of deal as a higher risk and a means to further contribute to financial distress.

Taken together (both your bankruptcy and your application for a cash-out refinance going forward), lenders need to decide whether it makes sense to handle your debt problems going forward — even those debts that have been erased — by approving a new loan for more than what you already owed on your home. They’ll only be able to reach a decision after closely examing your property, income, and recent financial transactions.

Final Thoughts on Cash-Out Refinance After Chapter 13

The type of bankruptcy you declare — in this case, Chapter 13 — will automatically impact how long you’ll need to wait before you’re eligible to refinance your mortgage. While there are a few exceptions, your property will be managed by a bankruptcy trustee who will oversee all ways to reorganize your debt and produce payments to your creditors.

As mentioned, you are not required to give up your property in a Chapter 13 bankruptcy and it has become the remedy of choice for those facing foreclosure. After discharge, be prepared for extra scrutiny on any deals going forward, especially a cash-out refinance.

References

Author: Bryan Dornan

Bryan Dornan is a financial journalist and currently serves as Chief Editor of Cash Out Refi Tips.com. Bryan has worked in the mortgage industry for over 20 years and has a wealth of experience in providing mortgage clients with the highest level of service in the industry. He also writes for RealtyTimes, Patch, Buzzfeed, Medium and other national publications. Find him on Twitter, Muckrack, Linkedin and ActiveRain.

Leave a Reply

Your email address will not be published. Required fields are marked *