How to Refinance a Home Equity Line of Credit After a Bankruptcy

Refinancing your home equity line of credit can provide you needed relief after bankruptcy. The catch is that lenders typically run in the other direction when you apply for a loan with bankruptcy on your record. Don’t let this deter you. There are lenders out there who will take a chance on financially recovering homeowners. The key is to be upfront about your bankruptcy: what caused it and what you’ve done to improve since its discharge. You will probably be subject to higher rates and fees, but you can at least begin to amortize the loan to move toward payoff.

Step 1

Contact lenders to compare rates and terms. Ask the representatives if they look at applicants who have previously filed bankruptcy. Ask if rates or fees are higher for such applicants. Write down the information as well as the name of the person you spoke with.

Step 2

Fill out an application at the lender of your choice. Indicate that you wish to pay off an existing home-equity line of credit. Only list the outstanding balance in the amount requested, not the credit limit. For example, if you owe $100,000 on a $125,000 line, you need $100,000 to pay it off.

Step 3

Sign the application and any necessary disclosures and authorizations. The bank requires your permission to run your credit report.

Step 4

Submit financial information. The type of info depends on the bank, but usually you need to provide two years of W-2 forms and federal tax returns along with one month of pay stubs.

Step 5

Submit a written explanation of the bankruptcy -- specifically, the reason you had to file and how your situation has improved. For example, “I was on disability for six months following an accident at work. The diminished income and medical expenses made it impossible to pay my creditors. I have since recovered and returned to work where my salary has increased over the past year. In that time, I have had no delinquencies.”

Step 6

Sign your commitment letter upon approval. Set a closing date and obtain a payoff figure on your equity line from your existing lender. The payoff should be good through the date of closing with a per diem. The per diem is the amount of interest charged for each day the loan is active.

Step 7

Attend closing and sign the loan documents. Once complete, the new lender will transmit the funds to pay the existing loan. Your equity line will be paid off, and you will have a new loan despite your bankruptcy.

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