Are HELOCS Dischargeable in Bankruptcy?

Home equity is exempt in Florida, although the amount of the exemption may be a matter of time. If you have a Home Equity Line of Credit, the actual debt may be wiped out but not the lien on your property

What is a HELOC?

Many people refer to a HELOC as a “home equity loan.” But, strictly speaking, a HELOC is not a loan. A HELOC is more like a secured credit card: the bank agrees to extend a predetermined line of credit and, if you default on the payments, the bank may foreclose on the lien you gave the bank.

Chapter 7 Bankruptcy

A Chapter 7 Bankruptcy discharges the debt, but does not erase the lien. So, you have no personal liability to repay the note, but the bank can take your house if you default on the payments.

What’s the difference? Assume there is a deficiency, because you are underwater (your mortgage balance exceeds the fair market value of your home). Because the bankruptcy discharged the underlying debt, the bank may not sue you for the deficient amount.

Chapter 13 Bankruptcy

You may not have to repay the entire HELOC balance in a Chapter 13. If you are underwater on the mortgage, the court may allow you to strip-off all or part of the amount.

If you must repay the entire amount, which is likely, you can set the payments yourself in the Chapter 13 plan. As long as the trustee finds that the plan is reasonable, you can pay back the HELOC in equal monthly installments through the plan period, as opposed to the lump-sum payment that the moneylender is probably demanding.

For more information about what debts are dischargeable in bankruptcy, contact us for your free consultation.


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