A Home Equity Line of Credit is a secured loan that acts like an unsecured credit card. Many people took out these “second mortgages” on their homes as a way to convert the home equity into cash while staying in the residence. What happens to your HELOC mainly depends on the Chapter you file.
HELOC in Chapter 7
In a Chapter 7, the discharge order extinguishes your liability on the note, but the lien against the property stays in place. In other words, you have no personal liability to repay the debt, but the bank can foreclose on your house for defaulting on the note once the automatic stay expires. Strip-off may be an option in the Middle District of Florida: if there is not enough value in the home to secure the second lien, the court may remove both the lien and your personal liability in some cases.
Realistically speaking, foreclosure is unlikely for a junior mortgage, such as a HELOC. The proceeds from the sale go to pay the first mortgage, and then if there is anything left, a junior mortgage is paid. There is usually nothing left, especially if you have little equity or even negative equity in the home.
This situation reinforces the idea that Chapter 7 is an excellent option for homeowners who are either current on their mortgages or do not wish to remain in their homes.
HELOC in Chapter 13
Like most other debts, a HELOC can be included in your repayment plan. For example, if you are $1,800 behind on your payments and your repayment plan is 36 months, you could expect to pay about $50 per month towards the HELOC. If the line of credit was a junior lien and was entirely unsecured, you may be able to strip off the loan, just as in a Chapter 7.
The creditor must accept your repayment plan, assuming that the judge approves it. Furthermore, because of the automatic stay, the moneylender cannot foreclose on the lien or make any contact with you regarding the past-due amount through the entire repayment period, without getting special permission from the court.
Contact us for a free consultation with attorneys who can help you get back in control.