How to Declare Bankruptcy and Wipe Out Your Home Equity Line of Credit

by Neal Frankle, CFP ®

Bankruptcy and foreclosure don’t always go hand in hand. You can actually declare bankruptcy, keep your home and lose your home equity line of credit . Yesterday I told you the story of a woman who had piled up tons of debt and was considering bankruptcy. In that post, I explained how she could declare bankruptcy and not lose her home.

Now I want to share a few ideas on how to declare bankruptcy and keep the home but lose the home equity line of credit debt.

As I see it, there are three options:

1. Turn secured debt into unsecured debt.

Normally, you are NOT relieved from your real estate debt when you declare bankruptcy. But if your attorney is really clever, she could convince the judge that the home equity line of credit is unsecured debt.


Well…let’s say you are upside down on your home. It’s worth only $200,000, but you have a first mortgage of $200,000 and a HELOC of $50,000.

Since there is no equity covering the HELOC, your shiester…oops, I mean…sharp attorney could argue that the HELOC is unsecured debt. If she is successful, the judge might dismiss the HELOC.

This tactic might work, but let’s look at two other alternatives just in case.

2. Make an offer the company can’t refuse.

Some HELOC lenders accept lump sum settlements at steep discounts. They understand that they stand a chance of getting nothing if your home is foreclosed on.

Of course, to do this, you’ll have to come up with the money to pay in a lump sum…and if you had the money…you wouldn’t be in this pickle. You might be able to tap your family for an early inheritance or sell that vintage 1964 Mustang you have rusting in the garage. If you can come up with the cash, consider approaching your lender with an offer.

3. Modify your loan.

This is a variation on the tactic mentioned above. Tell the lender your situation and play hard ball. The lender understands that a reduced payment is better than no payment at all. Pour a little sugar on it…baby. You might come away with a lower rate and balance as part of the debt payment plan.

I know you’d prefer to pay your debts than walk away from them. Sometimes, that’s just not possible.

When it’s not, consider these three alternatives to help you declare bankruptcy and wipe out your home equity line of credit.

Before taking any steps, I strongly recommend you consult a good bankruptcy attorney, but you can certainly ask about these alternatives. Just be sure to stay away from debt relief scams.

Now…for some ideas on how to stay out of bankruptcy…

Here are your reading suggestions for the weekend…

First, a few carnivals for your consideration:

Deliver Away Debt

Festival of Frugality

Consumer Boomer

Now some interesting articles:

5 Ways to Make Your Credit Card Work for You

Costs in Buying a Home Besides Your Mortgage

You are your own worst enemy

What is your credit card payoff?

Getting started on the path to wealth.

Change is possible.

What is giving?

Cash Envelope Budgeting – Why Banks Hate It

14 Free Ways to Spend a Friday Night



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{ 7 comments… read them below or add one }

Neal@Wealth Pilgrim April 28, 2010 at 11:42 AM

No problem Kevin


Kevin April 21, 2010 at 7:02 AM

Thanks for the link, Neal!

I only noticed this link now after seeing a referral in Google Analytics, as I did not receive a trackback for some reason!


Mrs. Not Made of Money April 16, 2010 at 2:11 PM

Thanks for the link!


Nunzio Bruno April 16, 2010 at 2:35 PM

Nice article and it does take a clever atty to pull that off. Timing is a big issue there as well, the more time you give yourself between moves the more pressure you take off the table especially when talking about refinancing time tables. At least it’s good to know that not all the lenders are out to get you, some of them want to see you keep that house :) Kudos!


Simple in France April 16, 2010 at 10:24 AM

You know, I always learn something here. I know some people get really angry at bloggers who talk about declaring bankruptcy, how to, etc. But I think that there are a lot of people out there in serious financial trouble who are just watching their debt pile up like deer in headlights.

Having a little explanation of the facts can do nothing but good.


Neal@Wealth Pilgrim April 16, 2010 at 1:44 PM

Thx SIF…

I am certainly not a proponent of running up debts and then not paying them. I do think that everyone has the right to understand how the law works though…not just the people who can afford super expensive legal advice.


Tom @ Canadian Finance Blog April 16, 2010 at 4:42 AM

Thanks for the mention Neil!


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