Question: My wife and I are considering bankruptcy, since we have a great deal of credit card and car debt. We would also like to refinance our mortgage because our rate is so high. Unfortunately, even if we refinance, we will probably have to file for bankruptcy. I don’t think refinancing will do enough for us, though it will help and we want to keep our house. My question is, should I refinance before or after bankruptcy?
Answer: Whether you should refinance your mortgage before or after filing for bankruptcy depends on your chances of getting approved before and after bankruptcy and whether you file for Chapter 7 or Chapter 13 bankruptcy.
For more information on filing considerations, see our Bankruptcy: Should I File? topic area.
If you are considering filing for bankruptcy relief because you have large amounts of outstanding debt, refinancing your mortgage may not even be an option. Each lender has its own guidelines when evaluating your application to refinance. But if you have bad credit or a large amount of unsecured debt, you may not qualify.
On the other hand, refinancing after filing for bankruptcy can also be difficult. Many conventional lenders require bankruptcy debtors to wait a certain amount of time after their case is discharged before applying for a refinance. If you refinance your mortgage prior to bankruptcy and take cash out of your home equity, the bankruptcy trustee will want to know if you still have the money or what you did with it. In general, if you decide to refinance your mortgage before bankruptcy, it is best not to take any cash out.
Filing for bankruptcy can help your financial situation by wiping out your unsecured debts. However, even if bankruptcy frees up your monthly budget, lenders can still see it as a negative when considering your loan application. Many conventional lenders impose time limits on when you can refinance a mortgage after bankruptcy. Depending on the type of bankruptcy you filed and the type of loan (such as conventional, FHA, or VA) you seek, you may have to wait two to four years after your discharge before you can refinance.
But each lender is different. Just because you filed for bankruptcy does not mean that you can’t immediately refinance your mortgage afterwards. In general, if you find a lender who will refinance your mortgage right after your discharge, you may have a higher interest rate or less desirable terms because of your recent bankruptcy. Further, if you are in the middle of a Chapter 13 bankruptcy, you will need to obtain court permission before you can refinance your mortgage.