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5 Steps Before You Refinance While In Chapter 13 Bankruptcy

After the past several weeks of market volatility, refinance applications have skyrocketed. The MBA’s Weekly Mortgage Application Survey for the week ending February 28th found that the refinance index had increased by 26% from the previous week and was 224% higher than the same week one year ago. While asset values are high and interest rates are low, now might be the time you might be considering your refinancing options. However, if you’re in an active Chapter 13 bankruptcy, the court will need to get involved in order to approve the application.

Here are the steps you’ll need to take in order to get a refinancing application approved by the bankruptcy court while your Chapter 13 case is still active.

Step 1: Contacting your Bankruptcy Attorney

Your attorney’s office will need to coordinate with you to see whether or not refinancing your mortgage will affect your case in any negative manner.

When you approach your attorney, you’ll want to clarify for them whether you are seeking to take out any money as part of your refinancing agreement or if you plan to alter the monthly payment terms of your mortgage, moving forward.

Step 2: Pre-Motion Analysis of your Case & Refinancing Application

Once notified, your attorney’s office will need to analyze your case to determine whether or not this action will adversely affect your plan payment. A preliminary review of your debt payoff, the percentage due to unsecured creditors, and other factors is necessary before providing feedback on the likelihood of the success of any motion to approve a refinancing application.

Please be mindful that the refinance may not provide the help you want during the bankruptcy. Refinancing applications typically result in one of two outcomes. Either the applicant receives a sum of cash-at-close or they see a reduction in future monthly mortgage payments (or both). The former outcome can result in funds on-hand that will need to be paid to the court. The latter outcome can result in the court ordering a plan payment increase that matches dollar-for-dollar with the savings on your new monthly mortgage payment. Consequently, refinancing may not help as much as you think.

Step 3: Providing the Paperwork to Prepare the Motion

Next, you will need to provide the attorney’s office with a “Good Faith Loan Estimate” that articulates the terms of your refinancing agreement.

Step 4: Timing

Once filed, the motion will typically take a month and a half before the court will hear the motion. It is vital that whoever you are working with understands this timeline for approval so that they can guarantee the terms of your refinancing application through the hearing date.

Step 5: Hearing & Aftermath:

Your attendance at the hearing is not necessary. Your attorney will attend the hearing and will alert you of the outcome as soon as possible. Upon approval, the trustee’s office will issue a demand letter articulating the amount being requested for turnover and will provide you with the information to remit this payment. If a demand letter is received, you would need to send them the funds requested in a timely fashion. Additionally, if any increase to your plan payment is ordered you will need to alter your future plan payments to adhere to this order from the court.

For more information contact your Yuba City bankruptcy attorney at (530) 797-4402.

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