A Chapter 13 bankruptcy can be a godsend when you are facing tough financial circumstances. There are many reasons that a Chapter 13 bankruptcy can be a better option for you than a Chapter 7 bankruptcy. but, one often-cited negative of Chapter 13 bankruptcy is that your case is going to be open for quite some time, generally a minimum of 3 years and many times up to 5 years. While your case is open and pending, life doesn’t stand still – it goes on. Stuff happens.
For example, recently I had a client who is in the middle of a Chapter 13 case call me to say that he would really like to refinance his house loan. I’ve had other clients who have gotten transferred by their work to another city, and they need to sell their current house and purchase a replacement house in their new location. Whatever the reason, sometimes you need to get a new mortgage loan while in the middle of a Chapter 13 bankruptcy – the question is “Can I get a new mortgage loan?” Fortunately, the answer is “yes”. Unfortunately, the rest of the answer is “But it ain’t easy.” The easy part is getting permission from your judge.
To get permission, we need to file a “Motion to Incur Debt” with the Court. That motion states the particulars of what you want to do: Refinance an existing mortgage loan and whether you are getting cash back as part of the process; or selling your current house and getting a new loan for a new home. In general, if it makes common sense and you have a good reason for doing it, the judge will approve the motion. For example, if you are refinancing your house to get rid of an adjustable rate mortgage or because you have a “balloon note” with an end date coming up, the judge will almost certainly approve the motion. If the refinance will allow you to get a cheaper interest rate, the judge will also approve the mortgage. It gets a little trickier if you want to get cash back from the refinance – you’d better have a good reason for it. A good reason might be that your house really needs a new roof, and by refinancing you can pull out enough cash from your equity to replace that bad roof. The information that we’ll need to file the motion are things like:
1. The reason for the new mortgage loan
2. If cash will be taken out, and if yes, then what will the cash be used for
3. What is the interest rate on the new loan?
4. What is the new monthly payment going to be?
5. If the new monthly payment is higher than the old payment, how is the debtor going to afford the new monthly payment?
6. If the new monthly payment is less than the old payment, how will the monthly savings be spent (maybe your plan payment should be increased, for example)
7. What is the term of the new mortgage loan? Is it a balloon note? Is it an adjustable rate loan?
8. What are the closing costs going to be for the new loan?
The trickier part of new mortgage loans in Chapter 13 bankruptcy is finding a lender who will work with someone in an active Chapter 13 case. The lender will want to see the Court’s order approving the new loan. The lender will also need proof that the debtor has been current in all Chapter 13 payments AND payments on the debtor’s current mortgage loan for the past 12 months. The plan payment proof is easy to get from the trustee’s website and if the plan payment includes the current mortgage payment, then that’s no problem. If the debtor makes his or her ongoing mortgage payments directly to the mortgage company, then the debtor will need to request that proof of mortgage payments being current for the past 12 months.
Here at WM Law, we have a connection to a mortgage lender who is very good at getting our clients refinanced or even a new mortgage loan while the client is in the middle of a Chapter 13 case. So, if you need help with a new mortgage loan, just ask and we’ll get you set up right away!