HELOC and bankruptcy: Negotiating, Foreclosing or Settling?
If you have questions regarding how filing for bankruptcy will affect your home equity line of credit, meet with an attorney and have HELOC and bankruptcy explained to you before proceeding.
When you file for bankruptcy, the trustee reviews your case. If the trustee has no issues with your petition, you receive a discharge. This usually takes a few months. When you receive a discharge, most or all debt listed in the bankruptcy is eliminated. During the bankruptcy process, you have the option to reaffirm your mortgage and/or HELOCs (Home Equity Lines of Credit). A reaffirmation agreement is a legal, enforceable contract that is filed with the bankruptcy court. It states that you promise to repay all or a portion of a debt that would otherwise be subject to a bankruptcy discharge.
If you filed for bankruptcy and did not reaffirm the mortgage or the HELOC on your home, you can choose to walk away from the property without liability for the debt. If during the course of your bankruptcy filing, you DID reaffirm your mortgage/HELOCS, you could still be liable.
If you file for bankruptcy, do NOT reaffirm the mortgage/HELOCs, and are now considering walking away from the property, you have some room to negotiate with the lenders. Your mortgage lender (1st) may not care to negotiate with a loan modification. They could simply decide to foreclose and write off the loss resulting from what you owe on the property and what they will be able to get for the property when sold in foreclosure. If can comfortably afford the payment, there’s also the option of continuing to make the payment. As long as you do so, you can keep the property.
The HELOC lenders, on the other hand, don’t have the same options as your 1st mortgage lender. Lenders for your home equity loans probably hope that you want to keep your home. You should be able to negotiate a settlement of the balance owed or discuss coming up with a reduced payment option. Negotiations will go best for you if you have a lump sum to work with in order to offer to settle on the balance owed. If you go this route, make sure to discuss it in detail with an experienced accountant, as there could be income tax forgiveness issues.
Consider this example:
You owe $200,000 on your 1st mortgage.
You owe an additional $75,000 on two additional home equity lines of credit.
The property in question is worth $150,000.
In this situation, there is not equity to secure the home equity lines of credit (HELOCs).
Before you filed for bankruptcy, the HELOC lenders in the above example could have foreclosed on the property. They also had the right to sue for payment if you failed to pay as agreed. Since you filed for bankruptcy, their right to sue has been eliminated. They do still have the right to foreclose. They still hold a security interest in the property. Even though foreclosure is technically an option, the HELOC lenders are unlikely to do so.
For foreclosing to be any benefit to the HELOC lenders, the property value would first have to increase substantially because the 1st mortgage lender has priority. If the HELOC lender foreclosed, they would have to use the proceeds of the sale to pay off the first mortgage before they could benefit at all. If, after paying off the first mortgage, there is nothing left (as in the example above), foreclosure offers no benefit to the HELOC lenders. When the homeowner is this far upside down in their home, HELOC lenders are far more likely to charge off the loan.
Once you, as the homeowner, stop paying the HELOC payments, your lender is likely to claim the loans are uncollectible instead of starting the foreclosure process. The remaining debt will be sold to a collection agency. The collection agency will inundate you with phone calls. They will insist you must pay. They will say anything they think might make you feel that you need to pay. Remember that while they are allowed to call you all day every day if they want to, it doesn’t change the fact that you can’t be sued for payment. Your bankruptcy discharge provides you with this protection.
If you still have questions regarding bankruptcy and HELOCs or how filing for bankruptcy affects your home mortgage or home equity lines of credit, contact the southern California bankruptcy experts at Westgate Law.