Dear Bankruptcy Adviser,
I am currently in
Chapter 13 and would like to refinance my mortgage. I have $70,000 in equity and
would like to cash out about $10,000. Is that possible, and if so, with whom?
I was told that if you are still in bankruptcy (even though the payments are taken
out of my account monthly) that I could not cash out some equity.
Also, if I sell my house, do I get to keep the equity to purchase
another house or is it taken?
The short answer to your question
is yes. You can take out equity while in a Chapter 13 bankruptcy. You would need
court approval and you would need to show a good reason for the loan.
Unfortunately, this short answer does not address the problem of finding a lender
willing to provide that kind of loan. When your credit score is low, you are inside
a Chapter 13 bankruptcy and home values are decreasing daily, $70,000 in equity
is not very much. The only lenders willing to work with someone in bankruptcy
will charge high interest rates and high loan fees.
In the mortgage business, these lenders are called "hard-money lenders." In the
outside world, you might have heard them called "loan sharks." While the majority
of hard-money lenders follow the law, the law allows them to charge high interest
rates and high fees. For example, your interest rate would be at least 18 percent
with at least $10,000 in fees.
In the past, lending options were
more readily available to a debtor inside a bankruptcy.
Home values were artificially inflated so that
everyone's homes (even those that could be moved
via truck) were appreciating at rates never before
seen in our country. Lenders were willing to approve
incredibly risky loans because their actual risk
was nominal. Once the mortgage loan funded, the
lender immediately sold the debt to a third-party
investor. As a result, the lender had little or
no incentive to make loans that made sense.
Your second question deals with your rights to
the equity in your home. Generally, when you sell the property, you must first
multiply the current market value of your home by 8 percent. That number represents
the cost of selling your home. For example, a home valued at $200,000 will cost
around $16,000 to sell.
The remaining equity will be considered
an asset of your bankruptcy estate. That equity is protected only if your state
bankruptcy laws allow it. Typically, most states allow you to protect at least
$35,000 to $50,000 of home equity. Some states, like Florida and Texas, allow
you to protect all the equity in your home.
Finally, if you want to sell your
property, then the important issue is whether
you qualify for a Chapter 7 bankruptcy. In general,
people file Chapter 13 bankruptcy because either
they do not qualify for a Chapter 7 or they have
fallen behind on their mortgage and need to catch
up on the delinquent payments. Because I don't know
why you filed a Chapter 13, I cannot say specifically
whether you will be able to protect your home's
equity in a subsequent Chapter 7 filing.
The task is difficult and finding
the right lender will be the biggest challenge
you will face.