Refinance Your Home While in a Chapter 13

English: Mortgage rates historical trends

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Question Raised in Personal Bankruptcy Story

This personal bankruptcy story was shared in January 2012 by a blogger on a bankruptcy forum site: “I filed Chapter 13 in July 2011, confirmed November 2011. 1st mortgage and HELOC (interest only) are current and paying outside of bankruptcy. Will we ever be able to refinance our mortgages while in a Chapter 13?”

Definition of Chapter 13 Bankruptcy

A Chapter 13 bankruptcy is commonly called the Wage Earners Plan because it requires you to have a steady income before you can file for this type of bankruptcy. When you file a Chapter 13, you will be required to make a plan designed to pay off your unsecured debt with disposable monthly income over 3 to 5 years, depending on where your income falls as compared to the median income for the same size family in your state.

Definition of a HELOC and Relationship to a Chapter 13

A HELOC, the acronym for a Home Equity Line of Credit, is an additional loan taken out on a mortgage and may involve attaching another lien on the property. In a Chapter 13, a HELOC can be stripped from the original mortgage at the conclusion of the bankruptcy unless the mortgage along with the HELOC have been reaffirmed or the value of the home exceeds the amount of the first mortgage principal and the amount of the HELOC.

Stripping a HELOC from the mortgage means the homeowner is no longer responsible for the additional loan or loans that represent more than the value of the home. Stripping the HELOC principal does not mean that all the loan principal or the lien is necessarily stripped. If the value of the home is more than first mortgage principal, the HELOC loan can be stripped up to the amount that is not valued in the home equity.

How to Refinance a Mortgaged Home with a HELOC while in Chapter 13

As long as you are in a Chapter 13, you have to keep all your payments current on a mortgage, including any HELOC, in order to prevent the company from foreclosing on your property. Any stripping of part or all of a HELOC will only take place when the Chapter 13 bankruptcy is discharged.

There is no law preventing you, at any time before or after discharge, from renegotiating a new mortgage payment or from being able to refinance a new loan if you can. That means you can renegotiate or refinance a new mortgage during a Chapter 13 or after a Chapter 13.

One option some of you may have to refinance your mortgage along with any HELOC is through the Home Affordable Modification Program (HAMP). These loans are available through the end of 2012. For those who qualify for a HAMP, you can include your HELOC in your loan amount under the following guidelines:

  1. You have had your home equity account open for at least 9 months.

  2. You have not received home equity account loan assistance once in the past 12 months or twice in the past 5 years.

  3. You have been experiencing a financial hardship, such as job loss, divorce or medical emergency.

  4. You have a willingness and ability to repay the loan.

Being able to refinance a home during a Chapter 13 is a very difficult quest and usually requires a bankruptcy lawyer to help you with the legal details.

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