Home Equity Lines in a Chapter 7 Bankruptcy

Mortgages across the country have taken a hit over the past couple of years. With the recession hitting the housing market incredibly hard, three million homeowners are scrambling there way to lawyers looking for protection from foreclosure.

Some are filing bankruptcy to get some sort of relief from the mortgage companies but some are finding it difficult due to a home equity line of credit being attached to their mortgage. Throughout this brief synopsis, we are going to go over what a home equity line of credit is and what happens to this credit line when filing for chapter 7 bankruptcy.

A home equity line of credit is considered by most banking officials as being similar to taking out a second mortgage on any property you may own. These mortgages are secured debts from the mortgage or banking institution that are combined with the payments you are making on your home through a lease or own contract. Certain states, such as Illinois, allow you to discharge all debts that are not connected to property that you have stated you wish to keep. In this same state, however, you can not discharge a home equity loan due to the fact that it is a secured debt against the home you are looking to hang on to through the proceedings.

Other states take a different approach to these proceedings by determining the value of the home and the debts that are secured by this value. Anything that is over the value of the property in question is considered an unsecured debt and therefore might possibly be relieved through the filing of the chapter 13 bankruptcy. More often then naught, however, this is usually not something that is removed due to the fact that the unsecured debt was at one point connected to a property so it may be just reduced rather than removed from your record.

A home equity line of credit is a quick way to get cash you need to alleviate credit card bills and other debts. In the long run, however, you may be looking at a serious debt that will come back to haunt you down the road if you ever need to file for bankruptcy. Consult your financial advisor before taking part in any HELOCs and second mortgages to determine what happens to your home equity line during a chapter 7 bankruptcy.