Can You Refinance in Bankruptcy?

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    Refinancing Factors

    • Refinancing is the act of replacing one mortgage with another. Lenders are generally willing to help someone refinance, but the process is very similar to applying for the original loan. As in the first mortgage, the lender will carefully study the debtor's credit history and income levels when making a decision. A bankruptcy has an immediately negative effect on credit, lowering credit scores by hundreds of points and staying on credit reports for up to 10 years. As a result, few lenders are willing to finance in the middle of a bankruptcy.

    Credit Management

    • Lenders are primarily concerned with risk. They see a debtor going through bankruptcy as a serious risk to the profitability of the loan. After all, if the debt is struggling with current debts, replacing one liability with another will not help, and may increase the chances of a default. However, debtors can increase their chances of qualifying for a refinance by working to build up their credit again immediately after filing for bankruptcy, ensuring that all their required payments are made than they do not open new lines of credit. Eventually debtors can qualify for a refinance, although they may have to settle for a higher rate than they would have otherwise been able to get.

    Chapter 13

    • A Chapter 13 bankruptcy creates a payment plan that debtors must follow for up to five years before the court will officially cancel the remaining debts. This payment plan is designed to be manageable given the borrower's level of income. In certain circumstances, however, the borrower can request permission to use extra money from a refinance to pay off the remaining Chapter 13 payments early. The court must approve this refinance, a lender must be willing to make the loan and the debtor must usually have already paid off part of the plan.

    FHA Loans

    • FHA stands for Federal Housing Administration, a federal organization that offers a number of partially subsidized loans for more favorable terms than many traditional loans. There is a branch of FHA refinances, but the FHA requires that debtors in the middle of bankruptcy wait at least two years before applying for these refinances. Many lenders follow suit and require a similar waiting period.

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