28 Aug Talk of the Nation, August 20, 2007: The Aftermath of a Tumultuous Week on Wall Street
NPR really got some facts terribly wrong about bankruptcy and equity mortgage loans. Personal liability on equity lines can be discharged like any other debt, but that isn’t what was said on the call in show “Talk of the Nation” which aired on 8/20/07: The Aftermath of a Tumultuous Week on Wall Street . A caller stated as a fact that equity lines could not be discharged by bankruptcy, which is not true. To make matters worse, the financial expert, STEVEN PEARLSTEIN a business writer for the Washington Post, agreed with him!
Now to be fair, Mr. Pearlstein first qualified himself by stating that he wasn’t a bankruptcy lawyer. But then he went on to say that it was his understanding that if someone had signed for the equity mortgage personally that the new bankruptcy law would not allow the borrower to wipe out the debt in bankruptcy. This statement was incorrect.
The discussion was about sub-prime equity loans and the caller seemed to imply that there was some special consideration that was given to equity loans that didn’t apply to regular mortgages or other debts. He said that people who filed bankruptcy could be forced to pay the equity mortgage loans back after bankruptcy, and even if they had lost the house. The caller said that he understood that since equity lines are not forgiven by bankruptcy, and people are liable for payments forever, like indentured servants. He also said he had heard that if not paid, the mortgage company garnish the borrower’s wages.
The bankruptcy laws usually do not allow people to alter the balance owed or the amount of the monthly mortgage payments if the homeowner wants to keep the home. In limited circumstances, a second (or third+) lien, including equity lines, can be written off if there is no equity at all to support the lien. However, if a borrower surrenders the home or it is foreclosed upon, any mortgages, including equity lines, are discharged.
Additionally, Chapter 13 bankruptcy cases can give people up to five years to catch up payments on any kind of mortgage, if they want to keep the property.
As for equity loans being able to garnish wages; any debt owed can eventually become a judgment, which in turn can lead to garnishment if state law allows such. Not every state allows wage garnishment. North Carolina is not a wage garnishment state. But after a debt is discharged by bankruptcy, no creditor can garnish a debtor’s wages for payment of the debt, including equity lines discharged in the bankruptcy case.
Mr. Pearlstein said that while the new laws made the bankruptcy process more lender friendly, he believed that it still allowed people to make reasonable payments on equity balances. He was right about that. Bankruptcy is a bit more lender friendly now. Chapter 13 still exists to help reorganize and repay equity loans over a reasonable amount of time on property people want to keep.
However, both Chapter 13 and Chapter 7 can still help people discharge debts that they can’t pay – including equity loans.
See Chip Parker’s article: Can A Second Mortgage Be Wiped Out In Bankruptcy? March 27, 2007
See Dana Wilkinson’s article: Is Chapter 13 The Answer, Or Are You Kidding Yourself? March 22, 2007
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