Your home equity line of credit can present a serious strain on your budget – especially if you are already in trouble. Many people wonder if it’s possible to discharge a HELOC during bankruptcy in order to avoid continued payments. Whether or not you can discharge the HELOC, though, depends a great deal on the type of bankruptcy you choose.
Chapter 7 Bankruptcy
The short answer as to whether you can discharge a HELOC during Chapter 7 bankruptcy is “no.” At least not if you want to keep your house. During Chapter 7, you liquidate your unsecured assets, and your creditors are paid with whatever funds derive from the sale. This means that they may not get paid in full, but your situation is deemed severe enough that you aren’t required to pay all that you owe. However, if you want to keep your house, you have to keep making the HELOC payments. As long as you are up to date, you can usually keep your home.
Chapter 13 Bankruptcy
You can actually use Chapter 13 bankruptcy to get rid of a HELOC. With Chapter 13 bankruptcy, you create a payment plan that lasts three to five years. During this time, you continue paying on your first mortgage. The rest of your disposable income goes to a trustee assigned by the court. The trustee can then distribute payments to your creditors – including the HELOC lender.
Once the period of bankruptcy is over, your HELOC, along with credit card balances, are discharged/eliminated. As long as you continue paying your first mortgage you should be able to keep your house.
Each case is different, though, and the terms of your bankruptcy will vary. The bottom line is that if you are interested in eliminating your HELOC and keeping your home, Chapter 13 is your best bet. Chapter 7 bankruptcy won’t allow you to discharge your HELOC while keeping your house.
As always, though, you will want to consult a bankruptcy attorney to learn your options, and have the possibilities fully explained to you.
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