In Bankruptcy Information, Bankruptcy Questions

The real estate market is suffering in most places around the United States, but in Utah it’s booming. That’s good news for homeowners who may be looking to sell, but it also presents a trap for the unwary. That trap is called the home equity loan, also known as a home equity line of credit (HELOC) or home equity credit line (HECL). What you don’t often hear it called is a second mortgage, even though that’s exactly what it is.

Banks don’t like to call this taking out a second mortgage because that sounds so negative, but they’re anxious to loan you the equity in your house. Instead of calling it a second mortgage, home equity loans are marketed by banks as a way to unlock that equity in your house. Unlocking the equity sounds so good. After all, it’s your house and your equity. Why shouldn’t you be able to get at it? It’s just like making a withdrawal from savings, right?

Well, not exactly. When you withdraw from savings you have no obligation (except to yourself) to pay that money back. But when you get a home equity loan, it really isn’t your money — it’s the bank’s money and the bank now holds a mortgage (that ugly word again) against your house. That means if you don’t repay the money the bank can foreclose on your home. It also means that if you face financial difficulty and are forced into bankruptcy, you still must pay the home equity loan (and your first mortgage) to keep your house. There’s a temptation to take the home equity and use it to pay bills. This could be a really bad idea, and here’s why.

Very often, debt problems are the symptom of an underlying issue, such as expenses are too high for the income. Taking out a loan to fix this kind of debt problem is just putting a band aid on it. It doesn’t address the underlying issue. Once the home equity money is gone, the problem of less income and too many expenses will still be there. But, the worst part is, if the person then decides she needs to file bankruptcy to deal with the problem, she’s converted the debt from unsecured debt that is easily disposed of in bankruptcy into secured debt (the home equity loan) that must be paid to keep the house.

There might be good reasons to take out a home equity loan. Some valid reasons are to make needed improvements or repairs, such as a new addition or new roof; or to meet an unexpected emergency, such as a medical emergency. But most reasons for taking out a home equity credit line aren’t valid. They include things like that dream vacation around the world; buying a new boat because if you finance it through the house the interest is tax deductible; paying for your daughter’s wedding; or finally getting that 90″ TV that you have wanted for so long.

When it comes to home equity loans, the rule of thumb is “don’t do it.” This is especially true if you think bankruptcy might be necessary. If you need bankruptcy help, contact us here, or call or text (801) 413-3708, or email steve@schamberslaw.com.

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