Chapter 13 Bankruptcies are three to five-year payment plan. Inevitably, life happens. You are in chapter 13 bankruptcy and an opportunity arises to either refinance or buy a house. Can you refinance your house or buy a house during your chapter 13 bankruptcy?
The short answer to whether you can refinance your house during chapter 13 bankruptcy is YES. The Fair Housing Administration (FHA) has a guaranteed mortgage program for debtors in chapter 13 bankruptcy. The specific guidelines may change from time to time, but the basic requirements are as follows. (a) You need to have been in your chapter 13 bankruptcy for at least one you and paid the trustee payments as scheduled; (b) you will need to obtain your bankruptcy trustee’s approval to incur the new debt; and (c) you haven’t missed payments on other debts that are being paid outside your chapter 13 plan. It helps if you have taken some steps to reestablish credit.
How Do You Refinance Your House During Chapter 13 Bankruptcy?
When in chapter 13 bankruptcy, the debtor must receive, minimally, trustee approval to voluntarily incur new debt. Refinancing your house is just such a situation. Some districts might require court approval, and some might require a modified chapter 13 plan; but for the most part, the mortgage lender will only need trustee approval.
Here are the basic states to get trustee approval to refinance your house during chapter 13 bankruptcy.
Apply through your bank or mortgage broker for the refinance.
- Assuming the mortgage broker can pre-qualify you, you need to obtain the pre-qualification and loan term sheet (i.e. loan amount, term, interest rate, monthly payment, etc.).
- Contact your bankruptcy attorney and let them know you want to refinance your house.
- Be prepared to send at least 2 months of your most recent paystubs, the loan term sheet, pre-approval letter, and copy of your most recent income tax return.
- Your bankruptcy attorney will let you know if anything else is needed. Your bankruptcy attorney will likely want you to update your monthly expenses.
- Your bankruptcy attorney will draft a new Schedule I and J (income and expenses) and submit a request to the trustee to incur new debt and supply the documentation.
- Assuming there is no issue and that your circumstances haven’t significantly changed since your chapter 13 plan was approved, the trustee will send a letter authorizing the refinance.
- You take the trustee approval letter, give it to your mortgage broker, and hope for the best.
Some districts might require you to file a modified chapter 13 plan to add the post-petition debt, which sucks. Otherwise, yes, you may refinance your house during chapter 13 bankruptcy.
How Do You Buy a House In Chapter 13 Bankruptcy?
You may also buy a house during chapter 13 bankruptcy. The same FHA mortgage loan used to refinance mortgages during chapter13 bankruptcy can be used to buy a house. The process is the same as above but I would add two caveats.
- As a practical matter, buying a house during chapter 13 bankruptcy is more difficult because you still need a down payment. The question becomes, where is that money for the down payment going to come from if you are in chapter 13 bankruptcy?
- Please, please, please contact your bankruptcy attorney BEFORE you make an offer on a property. You want to complete the above steps before you make an offer.
How Much Will it Cost in Attorney Fees to Refinance or Buy a House During Chapter 13 Bankruptcy?
The answer depends on what your attorney will need to do. Obviously, how much it will cost will vary. As a general matter, if all we have to do is obtain trustee approval and manage the process that will likely be $1,000.00. If we have to obtain court approval and or do a modified plan, that will range from $2,500 to $3,500. If there is room in the refinance or home purchase, you can put your attorney’s fees in as a closing cost. Otherwise, it will be up to the attorney and local practice for how you pay your attorney for the additional services.