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Is the HELOC dischargeable in bankruptcy?

Welcome back. Earlier this week we discussed the difference between traditional home equity loans and home equity lines of credit (HELOC).

As we explained, while a traditional term, or closed-end home equity loan is a one-time lump sum of money that is secured by the mortgage at a fixed interest rate, a HELOC is actually more like a credit card account in that homeowners can borrow money as needed and credit revolves after being paid off. 

According to recent data from the real estate data firm RealtyTrac Inc., the HELOC is on the rise as homes are once again gaining value in Wisconsin and the rest of the country. The data firm reported that HELOC loans increased by close to 21 percent in the 12-month time period ending in June 2014.

The data firm said that’s likely because approximately 19 percent all homeowners with a mortgage in the U.S. now have at least 50 percent equity in their homes. With that kind of equity available, the HELOC is looking like an attractive option for more homeowners.

Because you don’t pay interest on the HELOC until you actually take out money, it is a popular choice for long-term obligations such as college tuition. Of course, sometimes long-term financial obligations add up and a homeowner becomes overwhelmed by debt that a home equity line can’t cover.

In that situation, homeowners may wonder if the HELOC can be wiped out in bankruptcy. The answer to that question is that it depends. Ultimately, the way a HELOC is treated in bankruptcy depends on whether Chapter 7 or Chapter 13 bankruptcy is used.

If Chapter 7 bankruptcy is used, the filer’s obligation to pay back the HELOC is wiped out. But since the HELOC uses the home as collateral, the bankruptcy filer will need to keep making payments on the HELOC in order to stay in the home. Otherwise, the lender holding the lien could repossess the home.

If Chapter 13 bankruptcy is used and the market value of your home is less than the balance on your first mortgage, the HELOC can be removed and treated like other unsecured debts in your repayment plan.  However, if your home is not underwater, it’s a different story.

For more information on how home equity loans are affected by bankruptcy, talk to an experienced bankruptcy lawyer in your area.  

Source: AllLaw.com, “What Happens with a HELOC in Bankruptcy?” accessed Nov. 3, 2014

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