HELOC in bankruptcy: dischargeable?

by Cathy Moran, Esq.

June 15, 2009

Questions about filing bankruptcyRemember the Star Trek episode about tribbles, who multiplied like rabbits?  In the world of filing for bankruptcy, it’s bad information that seems to be spawned faster than we can refute it.

A reader of my website, Bankruptcy in Brief, emailed me about conflicting input she was getting  as she tried to file bankruptcy without a lawyer.

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 dischargeability of a debt  has nothing to do with the terms of the loan.

The borrower’s personal liability for a home equity line of credit or a standard second position home mortgage is dischargable in bankruptcy.  The  discharge cuts off the rights of the lender against the borrower who has filed bankruptcy.  Even if the home equity line is destroyed by a foreclosure, after a discharge, the HELOC lender cannot sue the borrower.

The only issue about the scope of the discharge suggested by the question 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.  That’s know as lien stripping, for short.  The idea is that the lender really doesn’t have a secured claim if there is no value in the collateral that is available to that lender, after providing for lenders whose liens were perfected earlier.

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 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.

Image courtesy of Oberazzi.

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Cathy Moran, Esq.

I'm a certified specialist in bankruptcy law (California State Bar Board of Legal Specialization) practicing in the San Francisco Bay Area for more than 30 years. In addition to practicing bankruptcy law, I train new practitioners at Bankruptcy Mastery.

Last modified: October 22, 2012