The Impact of a Home Equity Loan After Bankruptcy
How a home equity loan (HELOC) impacts a debtor's post-bankruptcy life, is mostly determined by which type of bankruptcy the debtor filed and whether they signed a reaffirmation agreement. If a debtor has defaulted on their home equity loan, then the lender has a lien against the property. If a debtor files Chapter 13 bankruptcy , that lien can be removed if the home equity loan is unsecured.
However, if the debtor files Chapter 7 bankruptcy , while they may be able to discharge part or all of their home equity loan, they will not be able to get rid of the lien against the property. For example, if a debtor files Chapter 7 bankruptcy, keeps their home and their home equity loan is discharged because it is unsecured, the lien against the property will still exist. What does this mean for the post-bankruptcy debtor?
Well first let's look back a little. If the debtor reaffirms part or all of the home equity loan, not only will the lien survive the bankruptcy; but so will the obligation to pay the debt. However, sometimes a debtor remains in their home without reaffirming a mortgage. They just remain in the home and continue to pay. This creates a new set of problems.
While the post-bankruptcy debtor who did not sign a reaffirmation agreement is not obligated to pay the debt, the home equity lender can still foreclose on the property at anytime. If they do foreclose they cannot pursue the debtor for payment if the debtor did not reaffirm the debt. And even if the lender never forecloses, the lien they have can prevent the debtor from selling their home.
For a debtor who as exited bankruptcy without a reaffirmation agreement but with a home equity lien against their property, selling the home at any point will present problems. Post-bankruptcy debtors who want to sell their home, may want to consider negotiating some type of settlement with the home equity lender so that they will remove the lien.
If you have any questions or concerns about home equity loans and bankruptcy feel free to contact us at Allmand Law to set up a free consultation and we would be more than happy to help you.