HELOCs & Bankruptcy
An interesting scenario I came across recently may be useful to some who are in this type of situation. If you have a first mortgage and a HELOC, also known as a junior mortgage on your primary residence and are contemplating bankruptcy, first, seek an experienced bankruptcy lawyer to discuss your options. This type of situation can be confusing and difficult to understand and if you try to do it on your own, you are subject to make mistakes that could cost you in the end.
Some may think you do not have to pay the second mortgage in a Chapter 7 filing and retain the property. In a Chapter 7, bankruptcy your liability on a HELOC is removed and the HELOC lender is not able to sue you or demand you pay on your loan; however the HELOC is still tied to your property. The lien against the property survives the bankruptcy; therefore, the second still has the right to foreclose. If there is no equity in the property, it is, unlikely the HELOC lender will foreclose but does not prohibit them from doing so in the future if equity is re-established.
There are other possible consumer protections from a lenders lawsuit. One, being an anti-deficiency law that some states have so it is a good practice to know what you are dealing with. If for example, the first mortgage forecloses in an anti-deficiency state the HELOC lender would not be able to demand payment on any remaining balance left after the sale of the property. Another exception could be if you reaffirmed with the junior mortgage while inside your bankruptcy it would re-establish your personal liability to repay the junior mortgage.
What this means is you obligate yourself while in your Chapter 7 bankruptcy to an enforceable contract that is filed with the bankruptcy court and states your promise to repay all or a portion of a debt that may have been dischargeable in the bankruptcy otherwise. Sometimes you can negotiate with the junior mortgage lender because of the fact there is no equity in the property and they know that as well.
This is a very confusing topic and many do not understand or are under the wrong presumption their home is secure. You can locate affordable, discount bankruptcy attorneys in Phoenix, Arizona to get advice on how to proceed if you are thinking about filing a Chapter 7.