How to: Cash Out Refinance in Chapter 13 Bankruptcy

How to Get a Cash Out Refinance in Chapter 13 Bankruptcy

If you are a homeowner currently in an active Chapter 13 bankruptcy repayment plan, there is a strategy worth knowing about that many borrowers - and even some attorneys - are not fully aware of: a cash out refinance during Chapter 13 bankruptcy can allow you to pay off your entire repayment plan at once, potentially years ahead of schedule, and receive an early discharge from the court.

My name is Eric Vander Werff. I am a Senior Loan Officer with NEXA Lending (NMLS #107939), and I have specialized in Chapter 13 mortgage financing for over a decade. The cash out refinance is one of the most powerful tools available to homeowners in active Chapter 13 - and one of the most underutilized.

What Is a Cash Out Refinance During Chapter 13 Bankruptcy?

A cash out refinance replaces your existing mortgage with a new, larger loan. The difference between what you owe on your current mortgage and the new loan amount is paid to you in cash at closing. During Chapter 13 bankruptcy, that cash can be used specifically to pay off the remaining balance of your bankruptcy repayment plan - satisfying your obligations to the trustee and your creditors in full, and can be a way to obtain an early discharge of the bankruptcy.

In simple terms: if you have built equity in your home while in Chapter 13, you may be able to use that equity to get out of bankruptcy early.

Depending on your particular trustee or court – they may approve cash out for items like needed repairs, a replacement vehicle, or for urgent funds needed that you can’t obtain another way. Ask your attorney if you need cash out refinance funds that are outside of the Chapter 13 bankruptcy plan.

Why Would You Want to Do This?

The benefits of an early Chapter 13 discharge are significant:

• Freedom from trustee oversight. Once discharged, you are no longer under court supervision. Your finances are now your own.
• Simplified finances. One mortgage payment replaces your existing mortgage payment and consolidates the remainder of your plan.
• Credit recovery accelerates. A completed Chapter 13 is reported more favorably than an active one, and the discharge date starts the clock on your credit recovery timeline.
• Access to better loan programs. After discharge, conventional and other loan programs that were off-limits during active Chapter 13 become available for future refinancing into better terms.

Requirements for a Cash Out Refinance in Chapter 13 Bankruptcy

Minimum Time in Your Repayment Plan

You must have been in your Chapter 13 repayment plan for a minimum of 12 months, with all trustee payments made on time and within the month due. Lenders will verify this payment history as part of the underwriting process. The look back timeline for your mortgage will extend to 24 months, so a mortgage that was delinquent at the time of filing over 30 days past due may need 24 months seasoning to get started.

Equity in Your Home

This is the most important factor. You need enough equity in your home to cover both your remaining bankruptcy plan balance and your closing costs, while staying within the loan-to-value limits of your chosen loan program. The exact amount of equity you need depends on which program you use - more on that below.

Trustee and or Court Approval

Because you are taking on new debt while under the jurisdiction of the bankruptcy court, the court or trustee must approve the transaction. Your bankruptcy attorney will file the appropriate motion. You can begin the pre-approval process before that approval is in hand - in fact, most attorneys and trustees want to see a pre-approval letter and Loan Estimate before the motion is filed. Ask your attorney what the process is for your specific plan. Sometimes the trustee approves new financing unilaterally and this can speed up the process for your cash out refinance in Chapter 13 Bankruptcy.

Credit Scores

Most programs require a minimum 580 credit score for a cash out refinance in Chapter 13 Bankruptcy. Many borrowers in Chapter 13 for 12 months or more are in this range or above, particularly if they have kept credit accounts outside the plan in good standing. It’s common for one score to read n/a or no score 6-12 months after filing and that’s ok if the other two are above 580. Or if you have 3 scores one score is below, that’s ok also as lenders take the middle score of the three.

Stable Employment and Income

Lenders require documented, stable income - typically two years in the same line of work. Your income must be sufficient to support the new mortgage payment within program debt-to-income guidelines.

Loan Options and LTV Limits

Not all loan programs are available for a cash out refinance during active Chapter 13, and the maximum loan-to-value ratio varies significantly by program.

FHA Cash Out Refinance

FHA is the most commonly used program for this transaction. The maximum loan-to-value on an FHA cash out refinance during active Chapter 13 is 80% of the appraised value of your home. The transaction will require manual underwriting.

Example: If your home appraises at $300,000, the maximum new loan amount is $240,000. If your current mortgage balance is $160,000 and your remaining Chapter 13 plan balance is $60,000, the math works - and you could walk away from closing with your plan paid in full.

VA Cash Out Refinance

For eligible veterans, the VA cash out refinance offers the most favorable terms available. VA allows a cash out refinance up to 100% of the appraised value, including the VA funding fee if applicable. This is a significant advantage over FHA and non-QM programs, particularly for veterans who have not built substantial equity but still have enough to cover the plan payoff.

This is one of the situations where the VA benefit is at its most powerful - and one I am proud to help veterans navigate.

Non-QM Cash Out Refinance

Non-agency or non-QM programs are available for borrowers who do not qualify for FHA or VA, typically maxing out at 80% LTV similar to FHA, though requirements around time in plan and credit scores vary by investor. These programs typically require 2-3 years in the repayment plan and a minimum 640 credit score. Rates will be higher than government programs but they provide an option when FHA and VA are not available. Examples could be condos that aren’t approved by the agencies or self employed needing to use bank statements to qualify for a cash out refinance in chapter 13 bankruptcy.

How the Payoff Process Works

Once your loan is approved and you reach closing, the funds work like this:

1. Your existing mortgage is paid off in full.
2. Your remaining Chapter 13 plan balance is paid directly to the trustee or as directed by the court.
3. Closing costs are paid from the proceeds.
4. Any remaining funds, if applicable, come to you.

Your attorney then notifies the court that the plan has been satisfied in full, and the court issues your discharge. The timeline from closing to discharge varies by district but is typically a matter of weeks.

What Happens After the Early Discharge?

Once discharged, you are no longer in active bankruptcy. Your new mortgage payment replaces both your old mortgage payment and your monthly trustee payment - in many cases resulting in a similar or lower total monthly obligation. From a lending perspective, you are now in a much stronger position: programs like conventional financing 2 years after discharge become accessible, and future refinancing after discharge of chapter 13 bankruptcy – into better terms is possible as your credit continues to recover.

Common Obstacles

Not every homeowner in Chapter 13 qualifies for a cash out refinance. The most common obstacles I see:

• Insufficient equity. If your home has not appreciated enough or your plan balance is too large relative to your home’s value, the numbers may not work at the current time. This is worth monitoring as home values change.
• Credit scores below program minimums. A 580 floor means some borrowers need a few more months of positive payment history before qualifying.
• Late trustee payments. Even one missed or late payment in the plan creates a significant hurdle and requires case-by-case review.
• Income that doesn’t support the new payment. Your new mortgage payment must fit within qualifying debt-to-income ratios.
• Derogatory credit outside the plan. Accounts not included in your Chapter 13 must be current, with no new late payments since your filing. A one time late or collection may be allowed – this is also case by case and will need an explanation.

Let’s Look at Your Numbers

A cash out refinance in Chapter 13 bankruptcy is a transaction with a lot of moving parts - home value, plan balance, existing mortgage balance, credit scores, income, and program eligibility all factor in. The fastest way to know whether this works for your situation is to get on the phone and run through it together.

I have helped many homeowners use this strategy to get out of bankruptcy ahead of schedule, and it is one of the most rewarding outcomes in this work.

Call or text: (206) 794-6388
Email: evanderwerff@nexalending.com

Eric Vander Werff | Sr. Loan Officer | NEXA Lending, LLC | NMLS #107939
Licensed in: Alabama, Arizona, California, Colorado, Florida, Georgia, Idaho, Illinois, Indiana, Kansas, Kentucky, Maryland, Michigan, Missouri, Montana, Nevada, North Carolina, Ohio, Oregon, Tennessee, Texas, Virginia, and Washington

Eric Vander Werff is a licensed Mortgage Loan Originator, not an attorney. Questions about your specific bankruptcy case, repayment plan, or the legal process of obtaining court approval should be directed to your bankruptcy attorney.

Equal Housing Lender | NMLS Consumer Access | NEXA Lending, LLC NMLS #1660690