How is a Second Mortgage or Home Equity Line of Credit Treated in a Chapter 7 Bankruptcy?

A Chapter 7 bankruptcy filing requires liquidation of unsecured assets to pay creditors. However, the law allows the Debtor to keep different categories of property up to certain values. As a result, the vast majority of Debtors who file Chapter 7 are allowed to keep all their property. After your Chapter 7 filing, you receive a discharge from all of your debt. As a result, your personal liability to pay back your HELOC is discharged. Because your HELOC is a secured debt (secured by a mortgage against your home), filing a Chapter 7 does not affect your right to continue to pay the HELOC and keep your home. The bank retains its right to foreclose against your home if you fail to make the monthly HELOC payments. However, the Chapter 7 discharge prevents the bank from requiring you to pay any deficiency after a foreclosure. This is important since you may decide to surrender your home as part of your Chapter 7 filing, if it is underwater, for example. The Chapter 7 Discharge allows you to walk away from the property without being required to pay back the HELOC. The discharge is also important because you may try to keep your home and continue to pay the HELOC, later fall behind so and face foreclosure. Again, the discharge protects you from personal liability for any deficiency after foreclosure.  If you are behind on your HELOC payments, a Chapter 7 filing will not prevent a foreclosure (with permission from the bankruptcy court while your case is still open). In the real world, the HELOC bank will generally not foreclose if they are not likely to be paid a meaningful amount after foreclosure sale. Because they are almost always the SECOND mortgage, they have to first pay off the bank holding the FIRST mortgage before they begin to recoup their investment from the foreclosure proceeds. The HELOC bank's unwillingness to foreclose under these circumstances can buy you time to work out an arrangement with them, or to refinance your mortgage once your credit allows, usually after 2-3 years.

The MA bankruptcy attorneys at Nashawaty & Rand serve clients throughout the Greater Boston Massachusetts region including Abington, Avon, Boston, Braintree, Brockton, Bridgewater, Canton, Dedham, Dover, Easton, Hanover, Hingham, Hollbrook, Marshfield, Medfield, Milton, Norwell, Norwood, Quincy, Randolph, Rockland, Sharon, Stoughton, Walpole, Westwood, Weymouth, Whitman, Massachusetts.

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Thank you for your work in my Bankruptcy case. I could not believe the process was so easy, even with our problems in the beginning. Your patience and kind words made it a pleasant experience. Now, I will be debt free for the first time since I can remember and I can enjoy the summer knowing I will be in my house for a long, long time.
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