Home Equity Line of Credit not guaranteed after Bankruptcy

by Jay Fleischman, Esq.

January 15, 2010

When you file a bankruptcy case, you might want to keep your mortgages intact.

You have the choice of reaffirming a mortgage or not.

If you reaffirm, the mortgage remains a lien on your property and you remain personally liable for the debt.  The contract is unchanged.

Sometimes, your lawyer will recommend that you not reaffirm the mortgage and simply continue making the payments as normal.  In this way, the mortgage remains a lien on the property but you are no longer personally liable for the debt. This way, if you fail to make a payment in the future, you may lose the property but you won’t be liable for any deficiency.

Sometimes, people have home equity lines of credit or HELCO’s backed by a second mortgage.  Sometimes, people want to keep these lines of credit open, even after bankruptcy.  But a line of credit is a “financial accommodation” and there is no absolute right to keep a line of credit open after bankruptcy.  Some banks or financial institutions will allow this.  They get high interest and it’s a good deal for them. Some will simply cancel your line and you are left to your own devices to get credit in the future.

If you still have equity in your house, maybe that’s a good thing.  You’ll find it easier to refinance in the future.  Maybe you’re better off not leveraging your house to the hilt. Look what happened last time people tried to do that.

Lakelaw represents people in mortgage matters in Illinois and Wisconsin.

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Jay S. Fleischman is a bankruptcy lawyer with offices in Los Angeles and New York. He can often be found on Google+ and Twitter, where he shares information about consumer protection issues and personal finance.

Last modified: October 21, 2011