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Bankrupt and looking to refinance mortgage

Dr. Don Taylor, Ph.D., CFA, CFP, CASL
Don Taylor

Dear Dr. Don,
We would like to refinance the mortgage on our home. At the same time, we recently filed for Chapter 13 bankruptcy. Are we out of luck?

-- Darlene Denouement

Dear Darlene,
Lower payments can help make funds available for other things, such as payments required by the bankruptcy plan. Given your credit record and score, you might not get much reduction in your interest rate.

First, there's a key question: What do you want to accomplish by refinancing? A lower rate can give you lower monthly payments. Lower payments can also be achieved by extending the loan term, although that also typically increases total interest expense.

Because you recently filed for bankruptcy, there could be a problem with the timing. Here's what the Federal Housing Administration FAQ page says about this:

"A Chapter 13 bankruptcy does not disqualify a borrower from obtaining an FHA mortgage provided the lender documents that one year of the payout period under the bankruptcy has elapsed and the borrower's payment performance has been satisfactory (i.e., all required payments made on time). In addition, the borrower must receive permission from the court to enter into the mortgage transaction."

Conventional financing requires a wait time of two years after the bankruptcy is discharged or four years after a bankruptcy dismissal.

If you qualify, there may be good options available under the government's Home Affordable Modification Program or Home Affordable Refinancing Program. A so-called HAMP modification can occur if you're in the midst of an active Chapter 13 bankruptcy case. It requires that you, your attorney or the bankruptcy trustee submit the request to the mortgage servicer.

Find the lowest refinance rate in your area.

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