HELOC in bankruptcy: dischargeable?
By Cathy Moran, California Bankruptcy Lawyer on Jun 15, 2009 in Bankruptcy Myths, Bankruptcy Practice and Procedure, Debts Not Dischargeable
The borrower’s personal liability for a home equity line of credit or a standard second position home mortgage is dischargable in bankruptcy. A reader of my website Bankruptcy in Brief, emailed me about conflicting input she was getting in her self prepared bankruptcy case.
I learned that the sources of misinformation continue to multiple: some HUD counselor told this 81 year old lady that if she was paying interest only on a HELOC, it was a dischargeable debt; if she was paying principal and interest, it was not dischargeable. Poppycock!
The only issue about the scope of the bankruptcy discharge implicated in this scenario is the principle that properly perfected liens survive the bankruptcy. So my client’s HELOC will remain a lien on her property after a Chapter 7 discharge; the lender cannot however sue her to collect any money on account of the HELOC. Its only rights are those against the collateral for the loan.
In a Chapter 13, a second lien on property whose value is less than what’s owed on senior liens can be voided.
Another piece of misinformation involved here is the client’s thought that she lists in her bankruptcy only those debts that are dischargeable. Wrong! The bankruptcy schedules call for the debtor to list all of his or her debts. The provisions of the bankruptcy code and sometimes the decisions of the bankruptcy judge determine what is dischargeable. All the debtor has to do is list it all.
Then there is the issue of HUD counselors practicing law—badly.
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