Can I refinance after a bankruptcy?

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Question:

I was forced to declare bankruptcy last year because of a layoff. I managed to hold on to my house because I did not have equity in it. I have a new job at 60% of my previous salary and am having trouble making ends meet. I would like to negotiate a lower interest rate with the mortgage holder, but am not eligible for refinancing because of the bankruptcy. How can I approach the lender about this? I am assuming that the bank would rather continue to receive my mortgage payments than foreclose.

Answer:

You are correct in one assumption: few lenders want to force a sale or foreclose. But you might not be correct in your other assumption -- that you can't refinance because of the bankruptcy.

As long as the market value of your house hasn't declined substantially since you bought it, it's still a well secured investment for your mortgage holder. In addition, you cannot file for bankruptcy for a certain number of years (depending on whether you filed a Chapter 7 or 13 bankruptcy), and so although your credit report has the negative mark of the bankruptcy, you're not as bad a credit risk as you would think.

The key for you is to gather documentation showing how much you can pay each month, verifying your income and if possible, substantiating your job security -- such as a letter from your employer attesting to your excellent performance, likely longevity, and probable raises. Also, gather up your bankruptcy papers showing which debts you've discharged, or other documents that can verify that you have no other long-term debts. Then call the mortgage holder and make an appointment with someone in the credit or loan department. Be upfront. But be positive, too.

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