Should I Refinance Before or After Bankruptcy?

Whether you should refinance your mortgage before or after filing for bankruptcy will depend on when you have a better chance of getting approved and whether you plan to file for Chapter 7 or Chapter 13. For more information on filing considerations, see Should I File for Bankruptcy?

Refinancing Before Bankruptcy

Refinancing your mortgage might not be an option before filing for bankruptcy relief if you have large amounts of outstanding debt. Each lender has guidelines when evaluating your application to refinance and if you have bad credit or insufficient income, you might not qualify.

That said, if you can refinance before filing for bankruptcy, you’d probably be wise to do so, regardless of whether you file for Chapter 7 or Chapter 13. Chapter 13 takes three to five years to complete, and you’d need court approval to move forward with the refinance. Even though Chapter 7 is much shorter, taking approximately four months, you’ll have a more challenging time qualifying for a refinance postbankruptcy.

Taking Out Cash Before Bankruptcy

If you decide to refinance your mortgage before bankruptcy, it is best not to take any money out of your home equity, if possible. The bankruptcy trustee will want to know if you still have the money and, if not, what you did with it.

Suppose you paid bills shortly before the bankruptcy case. In that case, the trustee might be able to use the clawback provision to recapture the funds and redistribute them amongst all creditors according to the rules in bankruptcy law. If you still have some or all of the money, you’d need to be able to protect it with a bankruptcy exemption—likely the wildcard exemption if your state has one because most states don’t protect much cash.

If you can't protect the cash or money in your bank account, you must turn over the funds to the Chapter 7 trustee or make provisions to pay the funds to creditors through the Chapter 13 plan. Learn about protecting bank accounts in bankruptcy.

Refinancing After Bankruptcy

Refinancing after filing for bankruptcy can also be problematic. Many conventional lenders require bankruptcy debtors to wait several years after filing before applying for a refinance. This is the case even after “discharging” or eliminating general unsecured debt, such as credit card balances, medical bills, and personal loans (but not student loans in most cases), and being a better credit risk because you have more funds to repay debt.

However, even though bankruptcy improves your monthly budget, lenders still see it as a negative when considering your loan application. 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.

Checking the Lender’s Bankruptcy Policy

Because lenders compete for clients, they maintain different approval policies. Just because you filed for bankruptcy doesn’t mean you can’t immediately refinance your mortgage afterward. However, if you find a lender willing to refinance a mortgage soon after discharge, you’ll likely pay a higher interest rate or receive less desirable terms.

Don't expect to refinance during Chapter 7. Most lenders won't talk with you. It is possible to refinance during Chapter 13 bankruptcy, but you must obtain court permission before refinancing your mortgage—and you might be required to use the difference to increase creditor payments. Talk with a bankruptcy lawyer about your options and the expectations of your local court.

Get more bankruptcy planning tips.