Can You Discharge a Home Equity Loan by Filing for Bankruptcy?

Bankruptcy can be a daunting and overwhelming process for anyone to go through. One of the main concerns individuals have when considering bankruptcy is what will happen to their debts, particularly their home equity loans. In this article, we will explore the topic of discharging home equity loans in bankruptcy and provide you with important information to help you make informed decisions.

Understanding Home Equity Loans

Before we delve into the specifics of discharging home equity loans in bankruptcy, it's essential to understand what exactly a home equity loan is. A home equity loan is a type of loan where a homeowner borrows money against the equity in their property. This loan is secured by the value of the home and is often used for major expenses such as home renovations or debt consolidation.

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Bankruptcy and Home Equity Loans

When someone files for bankruptcy, their assets and liabilities are evaluated, and a plan is put in place to repay creditors. Home equity loans, being secured debts, are treated differently than unsecured debts in bankruptcy proceedings. Secured debts are tied to specific assets, such as a home or a car, while unsecured debts are not.

Discharging Home Equity Loans in Bankruptcy

The discharge of a home equity loan in bankruptcy depends on several factors, including the type of bankruptcy filing and the value of the property. Let's explore the two common types of bankruptcy and their impact on discharging home equity loans.

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Chapter 7 Bankruptcy

In Chapter 7 bankruptcy, also known as liquidation bankruptcy, most unsecured debts, such as credit card debt, can be discharged. However, discharging a home equity loan in Chapter 7 bankruptcy is more complicated. While it is possible to have the loan discharged, it typically involves surrendering the property securing the loan.

Chapter 13 Bankruptcy

In Chapter 13 bankruptcy, also known as reorganization bankruptcy, a repayment plan is created to repay creditors over a specified period, usually three to five years. During this time, you may be able to include your home equity loan in the repayment plan, allowing you to keep your home while repaying the debt.

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Factors to Consider

When deciding whether to discharge a home equity loan in bankruptcy, it's crucial to consider several factors:

• Equity in the property: If the value of your property exceeds the outstanding loan balance, surrendering the property may not be necessary.
• Ability to repay: Assess your current financial situation and determine if you can realistically afford to repay the home equity loan outside of bankruptcy.
• Long-term goals: Consider your long-term plans for the property and how discharging the home equity loan may impact those plans.

Alternatives to Bankruptcy

Bankruptcy should be considered as a last resort, and exploring alternatives is always advisable. Some alternatives to bankruptcy to consider are:

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• Loan modification: Contact your lender and inquire about potential loan modification options that could make your payments more manageable.
• Debt consolidation: Consolidate your debts into one loan with a lower interest rate, potentially reducing your monthly payments.
• Credit counseling: Seek guidance from a reputable credit counseling agency to create a plan to repay your debts.

Impact on Credit Score

Filing for bankruptcy will have a significant impact on your credit score. A bankruptcy filing can remain on your credit report for up to ten years, making it challenging to obtain credit in the future. However, rebuilding your credit is possible with responsible financial behavior and time.

Conclusion

Discharging a home equity loan in bankruptcy is a complex process that depends on various factors, such as the type of bankruptcy filing and the value of the property. It's crucial to consider all options and consult with a bankruptcy attorney to make informed decisions regarding your home equity loan and overall financial situation.

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Frequently Asked Questions

1. Can I discharge a home equity loan in Chapter 7 bankruptcy?

While it is possible to discharge a home equity loan in Chapter 7 bankruptcy, it typically involves surrendering the property securing the loan.

2. Will I lose my home if I include a home equity loan in bankruptcy?

If you include a home equity loan in bankruptcy, there is a possibility of losing your home, particularly in Chapter 7 bankruptcy. Consult with a bankruptcy attorney to understand the specific implications for your situation.

3. Can I keep my home and still get rid of the home equity loan?

In Chapter 13 bankruptcy, you may be able to include your home equity loan in a repayment plan, allowing you to keep your home while repaying the debt.

4. What happens to the remaining balance on my home equity loan after bankruptcy?

The remaining balance on your home equity loan after bankruptcy will depend on the specific bankruptcy filing. In Chapter 7 bankruptcy, the remaining balance may be discharged, while in Chapter 13 bankruptcy, it will be included in the repayment plan.

5. Can I qualify for a new home equity loan after bankruptcy?

Qualifying for a new home equity loan after bankruptcy can be challenging due to the impact on your credit score. It's advisable to consult with lenders to understand their specific requirements and explore alternative financing options.

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