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Refinancing a mortgage after bankruptcy

Arizona residents may wonder how filing for bankruptcy may affect a later refinance of an existing mortgage. It is important for a homeowner to understand the potential implications of filing for Chapter 13 bankruptcy before going through the process. One of the main reasons for a person to refinance a mortgage is to reduce monthly payments, which can make additional funds available to pay down the bankruptcy debt faster. However, reduced payments often go hand-in-hand with a lower interest rate, and banks may hesitate to offer a low interest rate to someone who has recently filed for bankruptcy.

In addition, a person cannot receive a loan from the Federal Housing Administration within one year of filing for bankruptcy. After one year has passed, the homeowner must produce evidence of compliance with the terms of the bankruptcy payment plan. Then, the judge must give the person permission to obtain a mortgage even when refinancing an existing loan. For those who do not qualify for FHA loans, banks will typically not grant a mortgage for two years after the bankruptcy is discharged or four years after it is dismissed.

Those who cannot refinance their existing mortgages may benefit from seeking a modification through the Home Affordable Modification Program. A HAMP modification may be allowed during bankruptcy.

Speaking with a local bankruptcy attorney before making the decision to file may help a person to choose the best option for a given financial situation. An attorney may be able to help advise on the difference between Chapter 7 and Chapter 13 and which could be a better fit. It may also be possible for an attorney to try to negotiate settlements or lower payments on some debts as an alternative to bankruptcy.

Source: FOX Business, "Bankrupt and Looking to Refinance Mortgage", Don Taylor, April 29, 2014

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  • MCBA | Maricopa County Bar Association
  • State Bar of Arizona
  • ABA | American bar Association | Defending Liberty Pursuing Justice
  • Oregon State bar
  • NACBA | National Association of Consumer Bankruptcy Attorneys
  • NACA | National Association of Consumer Advocates
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