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Columns: Bankruptcy Adviser
Justin Harelik   Expert: Justin Harelik
Bankruptcy Adviser
Your best choice may be to sell your home
Bankruptcy Adviser

Refinancing probably won't save your home

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.'s corrections policy-- Posted: July 10, 2007
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