Home Equity and Bankruptcy

Can you get home equity loans after bankruptcy? Is refinancing equity possible? The answer depends on the type of bankruptcy and when you are trying to get a home equity loan.

Home Equity and Chapter 7

A Chapter 7 bankruptcy is a “liquidation” bankruptcy—the debtor’s assets, apart from amounts which are deemed “exempt,” are liquidated and the proceeds distributed to creditors to get them as much repayment as possible. After that, the debts are discharged. Once debts are discharged—which could take as little as a few months, especially if fewer or simpler assets are involved—the debtor can apply for a home equity loan or to refinance any outstanding home loans or mortgages. (In a Chapter 7, the debtor can “reaffirm” secured debts, like mortgages—they are not discharged, but nor are the assets, such as a home, foreclosed on or liquidated.)

While it’s a not a given that the debtor will get a home equity loan, in many ways, the debtor is in a good position to do so. First, the equity in the home acts to secure the loan, making it safer for lenders. Second, since other debts were discharged, the debtor may have a good good debt to income ratio for a new loan.

Home Equity and Chapter 13

Chapter 13 is the “reorganization” bankruptcy—the bankruptcy court reorganizes the debtor’s debts and comes up with a plan for repaying them, or at least most of them, over a three-to-five-year period. Chapter 13 can be trickier for a debtor, if he wants or needs to refinance or take out a home equity. The reason is that while the plan is in force—for that three-to-five year period—the debtor needs court permission to take on new debt. Since the court want to make sure that the existing creditors are paid, it may be loathe to allow a debtor under its supervision take on new debt.

What to Do if You Can Refi or Take a Loan After Bankruptcy

Assuming you get home equity financing while in or after bankruptcy, you don’t need to do anything different than if you had the financing prior to bankruptcy—simply make sure you make all payments in a timlye fashion, both equity payments and interest payments. There is a good chance you will have to pay a slightly higher rate than otherwise, but apart from that, once you get the financing, there is nothing special to do. This affords you an excellent opportunity to start rebuilding your credit.

When to Talk to a Lawyer

If yours was a Chapter 7 bankruptcy and you were discharged, you probably don’t need an attorney to apply for a home equity loan or refinancing. However, if you are in Chapter 13 bankruptcy, an attorney can help you make your case to the court that you should be allowed to get the new financing or loan.