Bankruptcy

[monkeybug]

We have a family member who had decided to contact an attorney and file for Bankruptcy. This person was left with debt when her husband died and because she "can't" (whole different story) work feels she has no other choice. The debt is a few credit cards and an equity loan. She told me that she will be able to get rid of all the debt and keep her house (the one the equity loan is on). Is this correct? She plans on selling the house for what ever she can get once she is no longer on the hook for the equity loan.
I know nothing about all of this, but it just seems wrong that she gets out of a 60,000 equity loan, and then can turn around and sell the house that was collateral for that loan.
She got enough money from life insurance to pay off the loan and cards a few years ago, but she spent most of it, and used the rest to live off of until she qualified for social security.

 

[mill4023]

We have a family member who had decided to contact an attorney and file for Bankruptcy. This person was left with debt when her husband died and because she "can't" (whole different story) work feels she has no other choice. The debt is a few credit cards and an equity loan. She told me that she will be able to get rid of all the debt and keep her house (the one the equity loan is on). Is this correct? She plans on selling the house for what ever she can get once she is no longer on the hook for the equity loan.
I know nothing about all of this, but it just seems wrong that she gets out of a 60,000 equity loan, and then can turn around and sell the house that was collateral for that loan.
She got enough money from life insurance to pay off the loan and cards a few years ago, but she spent most of it, and used the rest to live off of until she qualified for social security.

I'm not an attorney, but that doesn't sound right.

The bankruptcy will eliminate her debt, so technically she won't owe anybody money for the house, but the creditor who gave her the equity loan will still have a security interest in the home. So I'm not sure how she can sell it without them releasing their interest on the deed and they aren't going to do that unless they get paid first.

 

[monkeybug]

I'm not an attorney, but that doesn't sound right.

The bankruptcy will eliminate her debt, so technically she won't owe anybody money for the house, but the creditor who gave her the equity loan will still have a security interest in the home. So I'm not sure how she can sell it without them releasing their interest on the deed and they aren't going to do that unless they get paid first.

Oh Okay, that makes sense.
Unfortunately her plan for if she can't sell the house is to just abandon it. It's a big house, and not in horrible shape (but needs work), but she doesn't want to pay taxes on it or deal with renting it out. She owns another house that she abandoned years ago.
Her plan for now is to go through bankruptcy, sell the house, and then give the money she makes on the house to her daughter so that she can buy them a new place to live. Oh, and she wants to keep some of the money to go on vacation...I'll let you guess where to...
I hope your right and legally she won't be able to do that!

 

[bettymae1121]

That doesn't sound right. The equity line is tied to the house, I don't think the bankruptcy court can/will strip it and just leave the 1st mortgage intact so she can sell and make a profit. If she's looking at a Chap. 7 (total liquidation) she'd have to sell the house pay back the 1st and 2nd mortgage, then if there is any $$$ left it goes to her other creditors, and any balance that is left after that is wiped out.

 

[tlbwriter]

Does she have any income at all? Is her house worth more than she owes? Bankruptcy isn't what it used to be. She may not be able to file at all. She may find that she doesn't get to discharge the home equity loan and still keep the money from selling the house. See here: http://www.bankrate.com/finance/debt/3-ways-to-lose-a-heloc-keep-the-house.aspx

 

[C.Ann]

Do you really believe she can do this? I wouldn't be losing any sleep over it..

 

[monkeybug]

That doesn't sound right. The equity line is tied to the house, I don't think the bankruptcy court can/will strip it and just leave the 1st mortgage intact so she can sell and make a profit. If she's looking at a Chap. 7 (total liquidation) she'd have to sell the house pay back the 1st and 2nd mortgage, then if there is any $$$ left it goes to her other creditors, and any balance that is left after that is wiped out.

I think it is chapter 7 because she plans on having no debt after its done. The 1st mortgage is paid, they owed nothing on the house when they took out the equity loan. She said that because the loan is an equity line of credit and not a mortgage she can keep the house with out having to pay anything on the equity loan. That part doesn't sound right to me. It seems to me that if the house is collateral on the loan, that would have to go during the bankruptcy too.

 

[tinatark]

She can't write off the equity loan in a Chapter 7 (traditional bky filing). She can file Chapter 13, where a percentage of her debts are paid over several (4 or 5) years

 

[monkeybug]

Do you really believe she can do this? I wouldn't be losing any sleep over it..

I would hope she can't do it, but it seems like people get away with a lot these days! She is convinced she can do it!
Normally I wouldn't give this sort of thing a second thought, but this is my husbands mother. Right or wrong he feels some responsibility for her, and it worries me because it worries him. Does that make sense?

 

[tlbwriter]

I think it is chapter 7 because she plans on having no debt after its done. The 1st mortgage is paid, they owed nothing on the house when they took out the equity loan. She said that because the loan is an equity line of credit and not a mortgage she can keep the house with out having to pay anything on the equity loan. That part doesn't sound right to me. It seems to me that if the house is collateral on the loan, that would have to go during the bankruptcy too.

From the link I posted earlier:

The first answer is "no" you cannot eliminate a home equity line of credit, or HELOC, that is secured by your home in a Chapter 7 bankruptcy while keeping the house. That line of credit must be paid in order to keep your property.

 

[monkeybug]

Does she have any income at all? Is her house worth more than she owes? Bankruptcy isn't what it used to be. She may not be able to file at all. She may find that she doesn't get to discharge the home equity loan and still keep the money from selling the house. See here: http://www.bankrate.com/finance/debt/3-ways-to-lose-a-heloc-keep-the-house.aspx

Her only income is social security, and its not much.
I think the loan is for more than the homes value too.

 

[monkeybug]

From the link I posted earlier:

The first answer is "no" you cannot eliminate a home equity line of credit, or HELOC, that is secured by your home in a Chapter 7 bankruptcy while keeping the house. That line of credit must be paid in order to keep your property.

Thank you! This is exactly the info. I was looking for.

 

[tlbwriter]

Please keep us updated!

 

[mrsltg]

From the link I posted earlier:

The first answer is "no" you cannot eliminate a home equity line of credit, or HELOC, that is secured by your home in a Chapter 7 bankruptcy while keeping the house. That line of credit must be paid in order to keep your property.

Yes, BUT, the loan can be paid off at time of sale and not before. The loan will be discharged in the bankruptcy and her responsibility will be to pay when the home is sold - not necessarily in monthly installments.

Also, if this loss is recent, she should consider waiting. Making any major life changes while in such emotional upheaval is a bad idea.

 

[sparklynails23]

Doesn't it depend on the state? Don't some have homestead clauses for bankruptcy situations?

 

[tlbwriter]

Yes, BUT, the loan can be paid off at time of sale and not before. The loan will be discharged in the bankruptcy and her responsibility will be to pay when the home is sold - not necessarily in monthly installments.

But that still means she won't be able to do what she has planned to do - discharge the loan in bankruptcy, and keep all of her equity in the house so she can sell it after the bankruptcy.

 

[luvsJack]

In a chapter 13, the unsecured debt is wiped clean. The only thing you would pay would be secured debt--the equity loan and some of the interest is wiped out of that. Not sure if it is still that way, as the laws have changed, but that is the way it used to be.

Could that be what she was thinking?

 

[mill4023]

Yes, BUT, the loan can be paid off at time of sale and not before. The loan will be discharged in the bankruptcy and her responsibility will be to pay when the home is sold - not necessarily in monthly installments.

Also, if this loss is recent, she should consider waiting. Making any major life changes while in such emotional upheaval is a bad idea.

I don't think so. The loan will be discharged, but the bank that gave her the loan still has a security interest in the home. If she stops making payments on that equity line, they can foreclose.

It's a weird situation, because after the discharge, she will have no obligation to pay the equity line and the bank is not allowed to pursue collection of the debt because there isn't any debt. But the bank still basically owns part of the home and if she wants to sell it, she'll have to pay them the amount that was owed on the equity line.

 

[tvguy]

Doesn't it depend on the state? Don't some have homestead clauses for bankruptcy situations?

I think state laws do vary.
It just seems to me ....in my opinion....that too many people choose bankruptcy, when, with a little reorganziation, they could pay off their entire debt in full.

 

[Disney-Kim]

Oh Okay, that makes sense.
Unfortunately her plan for if she can't sell the house is to just abandon it. It's a big house, and not in horrible shape (but needs work), but she doesn't want to pay taxes on it or deal with renting it out. She owns another house that she abandoned years ago.
Her plan for now is to go through bankruptcy, sell the house, and then give the money she makes on the house to her daughter so that she can buy them a new place to live. Oh, and she wants to keep some of the money to go on vacation...I'll let you guess where to...
I hope your right and legally she won't be able to do that!

First of all...in either a ch 7 or a ch 13 she will NOT be able to keep the proceeds of the house sale. ch 7 would take the asset (proceeds) and ch 13 would apply it to the plan. either way she will get NO cash in her pocket.
It depends on her income whether she will qualify for 7 or 13 and they will both give her the ability to walk away or pay back some of her debt..but at the loss of her house. She CAN keep her house in a ch 13 but will have to pay debt back over a 3 or 5 yr period. The point of a ch 13 is to protect assets, the ch 7 you lose all assets but don't pay money back and you could keep your house IF you have less value than allowed..but if you have lots of equity...your in trouble...

also...she can absolutely get rid of a 2nd mortgage if she does a ch 13 and her house is worth less than the first mortgage and still keep her house - its called loan stripping and it is another reason to do a ch 13. but again she will not get cash from any of this....but again depends on value of the house

Ch 13 is debt reorganization and payback and keeping your assets such as a car or house, ch 7 is a clean slate with loss of assets.

there is always more to the story.... because she could do ch 7 to wipe unsecured debts and then sell house after the discharge and the cash would be hers...but the only way to get rid of a SECURED debt like a HELOC or HELO is with ch 13....unless the house is given up

and it is very legal to do not pay debts and/or to do bankruptcy....there are no debtors prisons