Can a HELOC be discharged in bankruptcy?

Declaring bankruptcy is a serious decision to make when trying to clear yourself of debts you carry that you are unable to repay. One debt that many are facing is a home equity line of credit (HELOC). Whether you can discharge this debt depends upon a few factors including what type of bankruptcy you are filing and if you plan to keep the house, among others. With all legal matters it is best to rely upon a specialized bankruptcy attorney who can review your specific circumstances to lead you in the correct direction. Bankruptcy and real estate law are serious matters and do require an expert to review your specific case as laws do vary by region.
Firstly, if you are to file Chapter 7 bankruptcy you may be able to discharge the HELOC but what happens to your home depends on the circumstances. With a Chapter 7 case your debts are discharged completely if approved and there is no repayment to be made, with certain debts being ineligible. If you plan to keep your home you must remember that the bank who you received the line of credit from holds a lien and can foreclose on you at any time even after the loan has been discharged. As the HELOC lien holder will be the junior lien holder if foreclosing they must first pay the senior lien holder (which will be your first mortgage) with the proceeds. So because of the obligation to pay the senior lien holder the junior lien holder will in most cases only foreclose if there is equity in your home to recover proceeds from.
A Chapter 13 bankruptcy differs in that you repay your debts over three to five years according to an approved plan and then your debts are discharged. In this situation the lien will also be removed from your home at the end of the repayment plan when the debt is discharged.

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.