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Is a home equity loan a recipe for debt management struggles?

If one of the benefits of accumulating home equity is peace of mind, it may be tempting to draw against that reserve with a home equity loan or second mortgage. However, there are potential dangers with this approach. As a law firm that focuses on bankruptcy law, we have seen far too many debtors fall into the traps created by home equity loans.

For starters, the consequences of falling behind on the monthly payments may be far worse than simply filing for bankruptcy in the first place. A home equity loan generally offers no protection against foreclosure in the event of default. The borrower has given the creditor or loan administrator a security interest, or lien on his or her property. The creditor can foreclose on that lien pursuant to the terms of the loan, even if the homeowner is current on his or her first mortgage. The terms may also be unfavorable, as in the case of a variable interest rate.

Notably, the protections offered by federal bankruptcy law might be more generous than the terms of a home equity loan. A Chapter 7 filing protects a portion of home equity via a federal homestead exemption for New Jersey filers, who can choose to utilize the federal instead of state exemptions.

In addition, bankruptcy law might offer a more advantageous solution to unsecured debt. The goal of either a Chapter 7 or Chapter 13 filing is to offer a fresh start to debtors who are struggling with unsecured debts, as well as other potential types of debt. Yet not all types of secured debt are dischargeable, and a second mortgage essentially turns unsecured debt into secured debt. If you are struggling with debt and considering a home equity loan, talk with a bankruptcy attorney first. 

Related Article: “Dangers Presented by Home Equity Loans,” copyright 2016, Goldman & Beslow, LLC

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Goldman & Beslow, LLC is a Federal Debt Relief Agency by an Act of Congress. We have proudly assisted consumers seeking relief under the U.S. Bankruptcy Code for over 38 years.

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