Refinancing your Mortgage within a Chapter 13

Interest rates on mortgages can vary considerably during the lifespan of the average Chapter 13 bankruptcy, that being five (5) years. For example, rates on fifteen (15) year fixed home loans were down below 3.5% interest recently. The traditional rule of thumb I have heard on refinancing is that if you can cut your interest rate by one percentage point (1%), then it is worth the closing costs to pursue it. This refinancing is NOT out of reach for a Chapter 13 debtor.

Even though in bankruptcy, a Chapter 13 debtor has a decent chance of finding a lender who will refinance their home loan while the bankruptcy is still pending. They will require an Application to Incur New Debt to be made and they will only approve the loan is an order approving the application is entered by the court. The courts will typically approve these applications if your Chapter 13 is in good standing and the debt appears to be manageable.

However, there are other ramifications to keep in mind. First, if the refinancing of the loan decreases your monthly loan payment made directly (outside the plan) to the lender, then your budget is affected. That means your will also have to file an amendment to your Schedule J expenses. If the change is significant, you may be required to modify your plan payment and pay the savings your realized into the plan each month.

This may be discouraging because you refinanced to save money each month and then that very savings still has to get paid out; you do not realize any of the savings. So, it must be a long-term gain to make it worthwhile during the Chapter 13. If you have several years to pay on the mortgage beyond the Chapter 13, then it will be worthwhile.

There is a second ramification to be careful of, though, and this one is potentially very costly. I will write about that one in my next post.