Our goal is to give you the tools and confidence you need to improve your finances. Although we receive compensation from our partner lenders, whom we will always identify, all opinions are our own. Credible Operations, Inc. NMLS # 1681276, is referred to here as "Credible."
Personal bankruptcy can help you recover from financial challenges but the process can impact your creditworthiness for several years.
For example, you may wish to refinance your mortgage to improve your repayment options. While it’s not impossible to refinance after bankruptcy, it can be harder to qualify.
Here is an overview of what you can expect to refinance your home loan after bankruptcy:
- Can you refinance after bankruptcy?
- Chapter 7 bankruptcy vs. Chapter 13 bankruptcy
- Benefits of refinancing your home loan after bankruptcy
- How to refinance your mortgage after bankruptcy
- Alternatives to refinancing after bankruptcy
Can you refinance after bankruptcy?
Yes, you can refinance your mortgage after bankruptcy, but having a bankruptcy on your credit report will make it more difficult to qualify.
It also depends on whether you file for Chapter 7 or Chapter 13 bankruptcy and the type of mortgage loan you’re looking to refinance. You may have to wait several years before you can start the mortgage refinancing process.
If you’re ready to refinance, Credible makes the process easy. You can see personalized prequalified rates from our partner lenders in just a few minutes. We also provide transparency into lender fees that other comparison sites typically don’t.
Chapter 7 bankruptcy vs. Chapter 13 bankruptcy
Chapter 7 and Chapter 13 are the two most common types of personal bankruptcy. Both filing options can reduce your total debt balance.
Here are some of the primary differences between Chapter 7 and Chapter 13 and how they can affect your mortgage refinance:
|Chapter 7||Chapter 13|
|You’ll sell (liquidate) your assets to pay off debt||You’ll enter a repayment plan to pay off debt|
|You can receive a discharge within six months of filing||You must repay debt within 3 to 5 years before remaining balance is discharged|
|May result in home foreclosure||Stops foreclosure proceedings|
|Remains on your credit report for 10 years after you file||Remains on your credit report for seven years after you file|
|Minimum waiting period to apply for refinancing after the discharge date:||Minimum waiting period to apply for refinancing after the discharge date:
The bankruptcy code is complex and can affect your credit history and ability to refinance in other ways, so be sure to speak with a bankruptcy attorney for personal guidance.
Chapter 7 bankruptcy
Chapter 7 bankruptcy, also known as liquidation bankruptcy, involves you selling assets upfront to pay back outstanding debts. It’ll remain on your personal credit history for 10 years from the filing date.
As part of Chapter 7, a bankruptcy trustee — the person appointed by the court to oversee your bankruptcy — may sell some of your nonexempt assets to satisfy the payment requirements of the creditors. Nonexempt assets typically include:
- A second home
- A newer model car or second car
- Stocks, bonds, and other investments
- Expensive clothing
- Valuable collections, such as a stamp collection or sports memorabilia
If the value of your nonexempt assets isn’t enough to cover your debts, the trustee may foreclose on your home. This is primarily what makes Chapter 7 riskier than Chapter 13.
How long does a Chapter 7 bankruptcy take? A Chapter 7 bankruptcy can take between four to six months to complete. Once you reach your discharge date, you’re no longer liable to pay back certain types of debt.
Waiting period for Chapter 7 bankruptcy
If you get to keep your home, you won’t be able to qualify for a refinance right away. You’ll need to wait a few years after the court discharges your bankruptcy before you can apply for another home loan.
The waiting period to refinance after a Chapter 7 discharge varies by the type of mortgage you have:
- FHA loan: 2 years
- VA loan: 2 years
- USDA loan: 3 years
- Conventional loan: 4 years
- Jumbo loan: 7 years
These multi-year waiting periods allow the lender to see if you can manage your remaining debts after the liquidation. It can be more difficult to refinance after filing for Chapter 7 than Chapter 13 since the waiting periods are longer and the event remains on your credit report for three extra years.
Chapter 13 bankruptcy
When you file Chapter 13 bankruptcy, you’ll agree to a repayment plan to discharge your debts, and any remaining balance discharges after completing the repayment plan. A Chapter 13 bankruptcy stays on your credit report for seven years.
One of the main benefits of filing Chapter 13 is that it stops foreclosure proceedings. As long as you can make the mortgage payments during the repayment period, you’ll be able to keep your house.
How long does a Chapter 13 bankruptcy take? A Chapter 13 bankruptcy can take between three to five years to complete, depending on your income and the terms of your repayment plan.
Waiting period for Chapter 13 bankruptcy
Chapter 13 bankruptcy waiting periods are generally shorter. For instance, after a Chapter 13 discharge, as long as you’ve made 12 qualifying on-time payments, you’ll only need to wait a day to refinance a government-backed loan.
The waiting periods to refinance after a Chapter 13 discharge are:
- FHA, VA, and USDA loans: 1 day with 12 qualifying on-time payments
- Conventional loans: 2 years
- Jumbo loans: 7 years
With conventional loans, if you don’t complete the terms of your repayment plan, the court can dismiss your bankruptcy, and you’ll have to wait four years after that date to refinance your mortgage.
Benefits of refinancing your home loan after bankruptcy
There are several benefits to refinancing after bankruptcy:
- Lower monthly payment: Refinancing can reduce your minimum monthly cost to a more budget-friendly amount.
- Lower mortgage rate: By taking advantage of low refinance rates, you can reduce the amount of interest you’ll pay over the life of the loan.
- Switch to a fixed interest rate: If you currently have an adjustable-rate mortgage (ARM), refinancing to a fixed interest rate can provide more stability to your monthly payments.
- Extra cash for debt payments: You may consider a cash-out refinance and utilize the equity in your home to repay high-interest debts.
How to refinance your mortgage after bankruptcy
Follow these steps to refinance your mortgage after bankruptcy and increase your approval odds.
1. Focus on rebuilding your credit
It’s harder to qualify for refinancing with a bankruptcy on your credit report. In addition, the filing will continue to negatively impact your credit score until the item is deleted from your report.
However, there are several ways you can improve your credit score:
- Make on-time payments for loans and credit cards
- Don’t apply for new credit accounts
- Maintain a credit utilization ratio below 30% on revolving accounts
- Dispute credit report errors
Rebuilding your credit also shows mortgage lenders that you can responsibly manage credit and make payments on-time for your current home loan and any other debts. It’ll also help you qualify for better rates and terms.
2. Make sure your waiting period is over
You’ll also need to satisfy the minimum post-bankruptcy waiting period after your discharge date. As discussed above, the waiting period varies by loan type and bankruptcy chapter.
You’ll also want to verify you meet the lender’s credit and financial guidelines before you apply. For example, you must meet the minimum credit score and remain below the maximum debt-to-income ratio (DTI) specified by the lender.
3. Gather and organize your documentation
Refinancing is similar to applying for a first mortgage. You’ll need to supply the standard documents plus certain bankruptcy forms.
Here are some of the documents to have on hand before you apply:
- Bankruptcy discharge papers
- Credit explanation letters for derogatory items
- Recent pay stubs
- Federal tax returns for the past two years
Your loan officer will likely request additional forms to verify your income and credit.
4. Compare lenders and loan types
It’s important to compare your refinance options from several lenders to find the best rates and terms. You can also score a better rate by giving your credit score a boost, supplying a larger down payment, and opting for a shorter loan term.
5. Apply for a refinance
The final step is applying for a mortgage refinance. This step requires a hard credit check but the new repayment terms can be worth the temporary credit score drop.
Alternatives to refinancing after bankruptcy
Refinancing your mortgage after bankruptcy may not be the best financial decision for your circumstances. For example, the refinancing costs may be too high or you might still be within the minimum waiting period. If so, consider these mortgage refinance alternatives:
- Make extra payments: Consider making extra payments to your high-interest debt and home loan. You can pay off the loan sooner and minimize your interest charges. Instead of paying closing costs, use those funds as an additional payment instead.
- Mortgage recasting: Many conventional loans qualify for a mortgage recast. This requires an upfront lump-sum payment to reduce your remaining principal balance and lower your monthly bill. Your payment term and interest rate remain the same and no credit check is necessary.
- Mortgage modification: Your lender may also be receptive to modifying your mortgage loan. It’s possible to extend the repayment period or temporarily reduce the interest rate without refinancing. However, your total loan costs can be higher if you have more monthly payments.