Chapter 13 Bankruptcy and Home Equity Loans: Interest-Only Repayment Periods End in Large Number in 2014
Chapter 13 Bankruptcy Can Strip Off or Modify a Maturing HELOC or Balloon Payment
While a Chapter 7 bankruptcy is a highly effective means of surrendering or walking away from real estate that you can no longer afford, a Chapter 13 bankruptcy will help you save real estate from foreclosure or other harm.
This can be especially useful when a home equity loan matures or, as will happen with $30 billion worth of HELOCs by the end of 2014 in what some are calling “the HELOC reset wave,” they reach the end of the initial draw periods in which interest-only payments are made and require much higher payments toward principal.
Likewise, if you are facing a large balloon payment or other loan acceleration, a Chapter 13 bankruptcy can help you modify the requirements of the payment and retain the house and, in some circumstances, eliminate the 2nd HELOC mortgage entirely.
How Does a Chapter 13 Bankruptcy Help? Lien Strip, Cramdown, Modification
A Chapter 13 bankruptcy can assist you in a number of different ways, depending upon the exact circumstances of your HELOC acceleration.
A lien strip is most useful when your home is worth less in fair-market value than you owe on a first mortgage. In this case, within a Chapter 13 bankruptcy process, you can “strip” the HELOC or second mortgage off, meaning that you pay it only in the same percentage you pay credit cards and other low-priority unsecured (no collateral attached) debts in your Chapter 13 payment plan. You pay what you can afford to pay over the 3-5 year term of your Chapter 13 plan, then the balance is discharged entirely, just as it would be in a Chapter 7 bankruptcy.
At the end of the Chapter 13, the creditor must remove its lien from the county register, and you are free of the mortgage burden entirely. No interest is paid on the loan in the Chapter 13, and no taxable liability results from the lien strip and discharge (as can often happen in a short sale or other non-bankruptcy process).
A lien strip only works if the property in question is your primary residence and if your home is worth less than you owe on the first mortgage. An appraisal prior to filing is nearly always required.
If the property in question is not your primary residence, it can be “crammed down.” This is a modification of the debt, not unlike a lien strip, but with some key differences. In a cramdown, you pay over the life of the Chapter 13 payment plan, an amount of money to lien-holding creditor equivalent to the home’s fair-market value (an appraisal will again be required), plus a low amount of interest known as “Till rate” interest. Whatever you owe the creditor on HELOC or mortgage note beyond that amount is treated, again, as an unsecured debt: paid in part, discharged in balance.
Your primary residence cannot be crammed down.
If you are dealing with a balloon acceleration payment or if a lien strip or cramdown are not appropriate for other reasons (for example, if your HELOC has moved from “second place” in recording on the county register due to the pay-off of a first mortgage that was in place when you took out the HELOC loan and so is now the “first mortgage” on the property), any secured claim can be “modified” in a Chapter 13.
That is, you can restructure a single, unmanageable balloon payment into 60 installments, modify to lower or eliminate interest, and so on.
Chapter 13 Bankruptcy and Home Equity Loans: The Bottom Line
The bottom line with regard to Chapter 13 bankruptcy and home equity loans is that there is a way out of the contractual demand being forced upon you by loan acceleration. Your creditor will have the opportunity to object, and negotiation as to the terms of the above options will often be required in order to get your Chapter 13 plan approved by the bankruptcy court—but, in bankruptcy, you hold the cards. Your creditors have only so much wiggle-room to argue as a relief from your debts through bankruptcy is simply your entitlement under Federal law.
None of these options are manageable or likely to succeed without an experienced bankruptcy attorney assisting you.
If you are a Michigan resident and would like to explore your options for a Chapter 7 or Chapter 13 bankruptcy with an experienced Michigan bankruptcy attorney, please contact us at (866) 674-2317 or click the button below to schedule a free, initial consultation.
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