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Columns: Bankruptcy Adviser
Justin Harelik   Expert: Justin Harelik
Bankruptcy Adviser
Sometimes it's best to ride out the bankruptcy process
Bankruptcy Adviser

Refinancing a mortgage in Chapter 13
 

Dear Bankruptcy Adviser,
Are there any institutions that will refinance mortgages or give home equity loans if a person is in Chapter 13 bankruptcy? If so, could you please give me a reputable listing of who would assist in my situation?
-- Connie

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Dear Connie,
The current market for mortgages has changed dramatically. So let me explain a couple things about how the current mortgage market works. Then I'll answer your question directly and tell you who to call.

When you, or anyone else who has filed bankruptcy, applies for a loan, home-equity line of credit or mortgage, you're only eligible for what are known as subprime loans. As you probably know, subprime means that the loan is riskier for the banks to make and as such, the terms are less favorable, i.e., subprime loans tend to have extremely high rates.

In the past, when a person filed a Chapter 13 bankruptcy, there were numerous subprime lenders available to look at refinancing out of the bankruptcy. Unfortunately, as subprime lenders continue to disappear, people who have subprime mortgages have been defaulting because they are unable to pay or refinance. This has put many of the lenders who do subprime mortgages out of business. Those who remain are being more careful than ever.

Let's get specific. Suppose you were to look at the total amount of equity you have in your home. Your total debt (the amount of debt included in your Chapter 13 plan and the balance on your home mortgage) needs to be 70 percent or less to have the possibility of finding a subprime lender, and you'll likely end up with an interest rate that's around 18 percent. That's extremely high.

For most people, this will make the mortgage payment so high that it's impossible to make. People who refinance into loans of this type usually end up falling behind on the payments and being forced into another bankruptcy or into foreclosure.

Additionally, you will likely be put into an adjustable rate mortgage. In my opinion, these mortgages are worse than staying in bankruptcy. These days, when interest rates on subprime loans adjust, they adjust up. So your loan might start at 18 percent and, within a few months of getting your loan, climb to 20 percent.

Finally, just to get a subprime loan, you're going to have to promise to make payments for a relatively long period of time. At the very minimum, you would need to make at least 24 to 36 months' worth of mortgage payments.

So let's recap. To get a subprime mortgage in today's market -- if you can -- you're probably going to have to accept an extremely high and adjustable rate and make payments for at least two years. That, in technical legal terms, is known as "a very bad deal for you."

The question you should be asking is whether you want a subprime loan at all. My opinion is that you ought to stay in the bankruptcy. See whether you qualify for a plan payment reduction. Regardless, I think you should stick it out where you are.

At this point, there is zero percent interest on the debt you have in the bankruptcy. Yes, there are attorney fees and trustee fees included, but you've already paid those fees, or are paying a portion of them each time you make a plan payment. At least your debt is not growing. When you refinance, you will likely find yourself in a situation where all the debt you have will be growing very quickly -- and soon enough you'll be worse off than where you are now.

However, if you are determined to get a subprime loan and try to refinance out of bankruptcy, here's who to call: everyone. Call every single mortgage company in the phone book and on the Internet in your area. Your type of refinance has become very difficult to obtain. If you want one, you're going to have to look long and hard.

Connie, I hope you can stick it out in your current situation. Sometimes, the best thing to do is nothing at all. You've already done a good job in going through the bankruptcy process. I say, stick with it.

Bankrate.com's corrections policy -- Posted: Nov. 13, 2007
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