Tag Archives: home equity line

Bankruptcy Alphabet: H is for Home is where the heart is

Home - Should you stay or go? Is Chapter 13 an option?

We all know the saying - “home is where the heart is” but what if I told you that your home is costing you, your family, and your heart nothing but heartaches? When does it make sense to walk away? Is Chapter 13 a good way to save your home?

The Problem - Overextended on home

If you were like many homeowners, you thought you had equity in your home and tapped into that equity by taking out a Home Equity Line of Credit (HELOC) or a second mortgage. Now you find yourself struggling to make your mortgage payments and your home is upside down. All of your efforts to negotiate a loan modification is falling on deaf ears and each time you speak with customer service they have a different story. (Or your mortgage company has lost the paperwork for the 9th time.)

Maybe you’ve already started to fall behind and now all the late charges and other fees are mounting up to something unthinkable. Maybe you’ve started to take on credit card debt so you can stay afloat. Maybe you’ve started liquidating your retirement.

The Solution

So, now what? This would be a good time to have a frank discussion with yourself. Chances are, your mortgage payments are only going to continue to increase. (Let’s face it, the interest rates can’t go any lower.) And the possibility of making more money isn’t looking that great. (Besides, aren’t you working enough as is?)

Consider the following:

How much is your home worth? This should be an obvious starting point. If your home is significantly underwater, it might be time to cut your losses.

How much is the principal & interest payment on your home? During the housing boom, many people purchased homes that they should have never qualified for because they don’t have the income to support the payments. One good example of this are people who had negative amortized loans who are now struggling to make the adjusted payments. Crunch the numbers to see how much your monthly payment should be. You can use a mortgage calculator to do this.

Can you get rid of the second mortgage with Chapter 13?

If your home is upside down leaving the second mortgage completely unsecured, you may be able to get rid of your second mortgage in a Chapter 13. This is better than any loan modification out there because the banks don’t have a say in the matter. If the value of your home is worth less than the first mortgage, we can get rid of the second mortgage - for good.

Who’s in charge?

It’s time to let your brain sit in the driver’s seat and take a hard look at your numbers. I’ve met with many clients who will insist a loan modification is the answer to their problems but when looking at the numbers, even at 0% interest, the client could not afford their home. Remember, your home should not only provide a place for you and your family to live, but should also be a good investment. Don’t let your home ruin you and your family’s financial future.

Bankruptcy Alphabet: B is for Borrow

Yesterday, we talked about asking the right people questions about bankruptcy. Today, we’re continuing our discussion and talking about borrowing in the context of bankruptcy. When you feel your financial world crumbling, there is a natural inclination to raise more money. The most common examples of this is borrowing against retirement funds, from family, friends, home equity line, against a children’s college fund or against someone else’s home equity. This is akin to putting a bandage over a wound that requires stitches and pretending that the Band-Aid is a permanent solution. The Band-Aid does nothing to solve the underlying problem and soon, you have to face your financial situation.

So, why is borrowing such a bad idea? Let me count the ways.

You need to retire one day. Chase doesn’t.

Retirement funds have a special status in bankruptcy in that most of the time, we can protect 100% of it. So, by liquidating or borrowing against your retirement funds, you are exchanging dischargeable debt with protected funds. Additionally, if you liquidate your retirement, or borrow against it but fail to repay, such funds are subject to income tax and penalties. Recent taxes are non-dischargeable. And trust me when I say that you don’t want to owe money to Uncle Sam. Lastly, your retirement money is just that - money set aside for retirement. It should not be used to repay credit cards.

Borrowing from friends and family.

In bankruptcy, family and friends are known as “insiders.” Borrowing from insiders can create problems. First, any money you repaid to insiders within last 12 months of filing must be disclosed on your bankruptcy petition. And the trustee can unwind the repayment by demanding the money back from the insider. Having the trustee threaten your family or friend for money you repaid probably won’t make for pleasant dinner conversation. Furthermore, instead of owing money to a Chase (which would be discharged) now, you owe money to your best friend. Lastly, even if you don’t repay any money, the debt to the insider must be disclosed on the bankruptcy petition. Meaning, your friend or family will receive notice of your bankruptcy.

Turning non-secured debt into secured debt.

This is another no-no. Oftentimes, clients will borrow against their home or worse, from their parent’s (or other’s) home to repay their unsecured debt, such as credit cards. It may sound like an attractive offer, with a reduced interest rate bundled into a single loan. But, this is a potential landmine. What happens when the client can’t repay the secured debt? Now, the home is subject to foreclosure!

So, instead of the worst case scenario being a potential lawsuit by credit card, now the client is facing foreclosure of their home or their family member’s home. Even after bankruptcy, liens generally survive. In another words, if you had $50,000 in credit card debt, that debt is discharged in bankruptcy. After the bankruptcy, that is the end of that debt. But let’s suppose, you borrow $50,000 from your home equity loan. Now, even though you won’t be personally liable for the debt after bankruptcy, the home equity lender may be able to foreclose* on your home.

*Sometimes, it’s possible to “strip” and get rid of a second mortgage.

Other B’s from Bankruptcy Attorneys

Bailout
Bank Account
Bank Account Levy
Bankruptcy
Bankruptcy Petition Preparers
Best Interest of Creditors
Business
Business
Business & Individuals
Business bankruptcy
Businesses and Business Debt
Buy Low and Sell High

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