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 Dear
Bankruptcy Adviser,
Is it OK to try to refinance our home for a
lower monthly payment even though we know that we will most likely be filing for
Chapter 13 bankruptcy in three months -- when my savings run out and our second
home goes into foreclosure?
We currently have an interest-only payment loan that eats up 63
percent of our monthly income. Thanks for your advice!
-- Tara  Dear
Tara,
I'm sorry to hear that you're in such significant financial
trouble. However, given the information you've provided, I think you have some
options. That's the good news.
One initial issue to take into
account is that to answer this question with 100 percent accuracy, you will need
to sit down with an attorney to discuss the options specific to your situation.
I can provide some general guidance, but it is impossible to answer your question
without more information.
The bad news is this: Of the options
you have, refinancing your home is not the best
one. I can understand why you want to stay in
your home. It's difficult for most people, at
an emotional level, to sell their home and leave.
However, it can be the best financial decision
in certain circumstances.
Tara, I think you may be in those circumstances. Currently,
your home loan eats up 63 percent of your monthly income. Even if the refinancing
lowers that payment, that will be more than offset by the fees involved and the
high interest rate you're likely to receive.
Imagine your best-case scenario:
You refinance very inexpensively and file Chapter
13 successfully. You saved a little money with
some legal fancy footwork. But then you didn't
get such a great loan because, based on your precarious
financial position, you couldn't. Slowly, your
interest rate adjusts higher and higher until
the monthly payment can't be made from your income.
Now you're a few years into a Chapter 13 repayment
plan and preparing to default! That's not where
you want to be.
Now, you may be able to find an
attorney to file this case. Some might even charge
you very little upfront. This is because
they anticipate that they'll get their attorney
fees regardless of whether you complete the plan.
They will have made their money and you'll be
losing your house. On top of that, you will have
wasted the money you paid into the Chapter 13
plan.
The
only way I would advise you to consider a Chapter 13 is if your monthly income
will be increasing significantly over the next few months. Then, you would qualify
for a better loan and you would have a better chance of completing the payment
plan. Tara, I know this may be hard to accept, but in your
position, you might make matters worse by filing bankruptcy. Your best move, and
I know this can be hard to hear, but your best move may be to sell your home and
move out. The reason is that your home is probably lost. The questions are whether
you also lose all of the equity in your home, and how well you can protect your
credit. If you sell your home, possibly both of the houses,
you will avoid having "foreclosure" on your credit report. You may also
avoid having "bankruptcy" on your credit report. You'll have the cash
from the remaining equity and whatever you're bringing in monthly to help you
survive and rebuild. Don't wait, Tara. It's time to make some
tough decisions, but at least you have the choices. In a few months, you may not
have any choices at all. Be brave and do what makes financial sense. You'll be
glad you did.
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