Understand the difference between filing for a Chapter 7 and a Chapter 13 bankruptcy. While a Chapter 7 (liquidation) bankruptcy is often discharged in a matter of months, a Chapter 13 (“wage earner” plan) petition often takes three to five years to reach discharge. However, after six to 12 months of “on time, as agreed payments,” homeowners in a Chapter 13 case may be eligible to refinance a mortgage well before their discharge date. 2 Prepare your financial life for a refinance. Keeping a primary residence during and after bankruptcy usually requires a homeowner to continue making all monthly payments on time. Shortly after receiving a discharge, begin re-establishing credit. If you continued making full payments on an auto loan, your credit score should not be as severely affected by the bankruptcy. Otherwise, try to get an auto loan as soon as possible. Should you purchase a vehicle at a “buy here, pay here” dealership, be sure they report to the credit bureaus to help your credit score. Get at least one new credit card. Even a fully secured card, requiring a deposit equal to the credit limit, helps prepare a credit report for a mortgage refinance.fair market value. Compare the FMV to the outstanding mortgage balance to learn the equity (ownership) percentage, typically called loan-to-value. For example, if the home appears to be valued at around $200,000 and the mortgage balance is $150,000, the LTV would be 75 percent. Homeowners with a recent bankruptcy discharge and an LTV exceeding 75 percent will have difficulty finding a reasonably priced mortgage refinance loan. 4 Try to build up some cash reserves. Bankruptcies typically deplete cash reserves. However, recently bankrupt homeowners improve their chances of refinancing if they can show some cash increases. Whether through a strong yard sale, a second job, successfully selling items in an online auction or another cash-generation plan, applicants with some cash reserves appear more stable and responsible, even with a recent bankruptcy discharge. 5 Be prepared for a challenge if you applied for a refinance less than two years from the bankruptcy discharge date. Since the real estate/mortgage “bubble” burst in 2007, the menu of available refinancing options for homeowners with less than good credit or a recent bankruptcy has shrunk severely. While a refinance is not impossible, homeowners should be ready to call, visit (in person or online), investigate and evaluate many mortgage lenders. The former large number of “sub-prime” lenders willing to make loans to recent bankrupts has fallen sharply. However, diligent homeowners can still find a reasonably priced mortgage refinance loan shortly after receiving a discharge. Things You Will Need Ownership of primary residence Mortgage Personal financial plan to re-establish credit Tips Waiting two years from a bankruptcy discharge qualifies homeowners, with good credit since the discharge, for a conforming (Fannie Mae or Freddie Mac) mortgage loan. Create a plan to fix finances and rebuild credit before filing a bankruptcy petition. Without fail, make all mortgage payments on time before, during and after bankruptcy discharge. Warnings Do not assume any home fair market value, particularly if the property has a substantial mortgage balance. An unpleasant loan-to-value surprise may be on the horizon. Resist the natural temptation to be impatient when searching for a lender interested in lending to a recent bankrupt. Patience is critical to locate the best mortgage loan available.
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