Can I Refinance My Home While I’m In Bankruptcy?

by Dana Wilkinson, Attorney at Law

March 24, 2009

It is possible to refinance your home while you are in bankruptcy, though it will require court approval. If you are in a Chapter 7 and are trying to do a traditional refinance (a new lender, all new paperwork, etc.) your lender is probably going to want to wait until you receive your discharge to complete the transaction, so it is rare to see a re-fi occur while a Chapter 7 case is active. However, refinancing while in Chapter 13 is relatively common, even in today’s market.

Usually a re-fi occurs after you’ve been in Chapter 13 a couple of years, and it is often used to pay off a Chapter 13 plan as well as restructure mortgage debt. Most people don’t want to roll an entire Chapter 13 “base” (total payment to be made in your plan) into their mortgage, and most lenders want some post-bankruptcy credit history before they will lend. But these are practical, not legal, obstacles, and as long as you seek the bankruptcy court’s prior approval of the re-fi, it can be done at just about any point in the process.

See–I just used the key words: prior court approval. If you are trying to refinance while your bankruptcy case is going on, you will need to ask for prior court approval of the re-fi. That means you have to plan ahead. It usually takes about thirty days for me to obtain court approval for my clients, and since it usually takes about the same length of time to prepare for a loan closing, that works out just fine IF I know what my clients are trying to do early in the process. Ideally, as soon as you have a financing commitment, you should contact your bankruptcy lawyer to start the process of obtaining bankruptcy court approval. Otherwise, you may find that the lender won’t close and your commitment expires, or the lender closes anyway and your bankruptcy case is jeopardized because you broke the rules.

Note that I said you need to contact your bankruptcy lawyer, not your Chapter 13 trustee. The trustee in your case will certainly review the proposed re-fi and what it means for your case, but she cannot approve the transaction by herself, nor can she ask the court to do so. You will need to go through your attorney for this one. You may hear from your mortgage broker or your new lender that they need a “letter” from the trustee or your attorney, implying that this is a simple matter that can be handled in a few minutes. It’s not, and they are wrong if they tell you that. It requires a motion that is filed with the bankruptcy court, a notice to your creditors, and the court will either set a hearing before the judge, or set up a mechanism for requesting a hearing. So, if you wait until the day before closing to contact your attorney, you have waited much too late.

Now, having emphasized how important it is to contact your attorney early in the process, there is such a thing as too early. Your attorney cannot usually obtain court approval for a transaction in a vacuum. The court is going to want to know who the new lender is, the interest rate, the term, the monthly payments, and whether you are paying points or fees. I am always happy for my clients to keep me in the loop when they are trying to obtain financing, but I usually can’t get started with court approval until we have a specific loan commitment.

Keep these things in mind as you try to refinance while in bankruptcy, and your re-fi will go a lot more smoothly–at least on the bankruptcy end of things.

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Däna (pronounced "Donna") Wilkinson, has been a bankruptcy lawyer in South Carolina for 20 years. She is certified as a bankruptcy specialist by the South Carolina Supreme Court.

Last modified: March 24, 2009