Refinancing a Mortgage After Bankruptcy

As published in The Star-Ledger, January 15, 2012

Q. I filed for Chapter 13 bankruptcy in June 2011. As part of the bankruptcy, I only have to pay my secured credit — the arrears on the mortgage on my home —and not the unsecured credit. I recently got a new job and I want to refinance my mortgage. There are 20 years left on the current mortgage. I’d save by refinancing to a 30-year loan, and then I could get my ex off the mortgage. What would a refi mean for the bankruptcy?

– Trying to improve

A. Good for you. Bankruptcy isn’t easy, and you’re taking steps to try to improve your situation.

Unfortunately, while a refinance could save you money each month, it could have an impact on your bankruptcy.

A Chapter 13 filing is one of the bankruptcy options available to an individual or a married couple with regular income seeking to reorganize debts and retain assets, said Ilissa Churgin Hook, a bankruptcy attorney with Hook & Fatovich in Wayne.

That’s different from a Chapter 7, in which the debtor seeks a discharge of debts in exchange for exposing assets to liquidation by a Chapter 7 trustee.

"A Chapter 13 case normally lasts three to five years and involves a payment plan which allows a debtor to, among other things, repay mortgage arrears and non-dischargeable taxes over time," Hook said. "As this Chapter 13 case was filed in June 2011, it should be an on-going case."

Hook said your home, which you hope to refinance, constitutes property of your bankruptcy estate. This means that the bankruptcy court retains jurisdiction over the house while the case is ongoing.

"Therefore, if the debtor desires to refinance the mortgage debt on the house, he will need to obtain bankruptcy court approval to do so," she said.

You’d need to file a motion with the bankruptcy court, adding notice to your Chapter 13 trustee and all creditors, outlining the proposed terms of the refinance and explaining how the refinance will benefit you.

"The trustee will almost certainly require full satisfaction of the Chapter 13 plan upon the refinance where the mortgage debt is the only debt being paid through the plan," Hook said.

She said the Chapter 13 requires you to pay unsecured creditors the greater of your excess monthly income, or what unsecured creditors would have received via a Chapter 7 liquidation of your assets.

"If the proposed refinance results in a lowered monthly mortgage payment and excess monthly income, the trustee may object to the refinance unless the debtor modifies his plan and pays a pro rata distribution to unsecured creditors," she said.

Your new job is also potentially a factor. Hook said you’d need to amend your schedules to reflect your new income.

"If the new job results in excess monthly income, the debtor may be required to make payments to unsecured creditors via a modified Chapter 13 plan," Hook said.

- A "Biz Brain" column by Karin Price Mueller