Bankruptcy and equity in your home Part 3 (final): I have too much equity in my home ... now what?

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So now you are a debtor that owns more of your home than can be exempted (protected) under chapter 7 bankruptcy; what do you do? Usually when this happens, the first thing people tell me is "I tried to get a home equity loan to pay my debt ... but my credit is so bad now, I cannot get a loan." The client wanted to use their equity to pay down their unsecured credit.

This is the time to consider filing for bankruptcy protection under Chapter 13. This is the way a debtors can protect their equity in their homes. So, of course, this is my recommendation. I'll usually say, "we could probably protect your home under chapter 13 with a payment plan."

Debtors continuously surprise me with the immediate response of "I'm not sure I want to do that." Think about it. They were usually willing to take a loan against their home, pay interest on the new debt and pay off the credit cards. Chapter 13 offers the opportunity to not take out new debt, pay mortgage arrears without additional penalties, discharge credit card  debt not paid during the chapter 13 payment plan, and not have to make payment for longer than 5 years. Obviously, that is an over simplification of the process but  worth the conversation. In many instances, chapter 13 can be better than a home equity loan.

My point is people, debtor with homes in trouble, should be open to chapter 13 as an option to chapter 7 bankruptcy. I always explore chapter 7 as the first option but it isn't always available. Chapter 13 is a viable option. Think of it as a second mortgage managed by the court instead of a financial institution.

On a side note, if you read some of my earlier blogs, you know I have written entries against using equity in your home to pay off unsecured debt. But there are times it may be wise to use proceeds from the sale of your home as you are down sizing. I have a client now who down-sized and thought she would pay off her smaller new home instead of her debt. She thought it would guarantee her a place to live as she aged. But the debt just grew and she never got it under control. Now she is in a chapter 13 case because she had too much equity. In hind sight, she may have been better off paying down the unsecured debt and getting a small mortgage. Again, just something to consider.

If you want assistance, legal representation, or just want to know more about Mark Medvesky or our firm of Wells, Hoffman, Holloway & Medvesky LLP, check out our website at www.whhmlaw.com or call us a 215-660-3170 and schedule an appointment.

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