Determining what will or will not be discharged in a bankruptcy is part of the equation that leaves most people scratching their heads. Homeowners have turned to their property as a way to consolidate debt. They hope to avoid bankruptcy through home equity loans, but is a home equity line of credit (HELOC) dischargeable as part of bankruptcy?

Definition

A home equity line of credit is based on the amount of equity (or the purchase price minus the amount of debt you have paid) in your home. The approved amount is not based on a set dollar figure; rather it allows you to spend up to a maximum amount.

Chapter 13 Bankruptcy

Many types of bankruptcy exist, each with its own benefits for specific circumstances. For individuals filing Chapter 13 bankruptcy, plan to repay debts over a three-to-five-year period. After this time, all debt will be forgiven if the obligation is met successfully. Among debts that can be discharged under Chapter 13 bankruptcy are mortgages and a HELOC.

Dischargeable

Chapter 13 bankruptcy provides homeowners with an opportunity to either remove a second mortgage or a HELOC, or reduce the amount owed. To qualify for discharging the HELOC, the current value of your home must be less than the value of the original mortgage. When the home value is less than the current market value, Chapter 13 bankruptcy will allow you to discharge the HELOC debt. It also will allow you to repay the primary mortgage and any amount owed in back-payments over the three to five year period.

Good Faith

One additional criterion for qualifying for the Chapter 13 HELOC discharge is the good faith clause. This simply means you must have gotten the HELOC with full intent of repaying the debt and honestly were not suspecting you would file bankruptcy.

Considerations

While filing Chapter 13 bankruptcy could be the answer you are looking for, consider that taking this path is risky and a big step. Home foreclosure will remain on your credit report for about seven years while bankruptcy is there up to 10 years. This will hurt your credit score. It also will hinder your ability to borrow money or get credit cards, and it will hit many aspects of your financial future.

Source:

Mortgage Professor: What Is A HELOC

Bankruptcy Attorneys: Chapter 13 Bankruptcy

Interest.com: Bad Credit