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Chapter 7 Discharge and HELOC

How much will Chase settle for a HELOC not discharged in a Chapter 7?

I own a home that was appraised in February 2010 for $215K. I filed Chapter 7 bankruptcy in May 2010 and am awaiting discharge as a "no-asset" case (trustee has already issued report). I have a first mortgage for $160K and a HELOC for $122K. I got a modification on the first that I am satisfied with and that I am paying. I am trying to figure out what to do with the second. My desire is to either settle it for a lump sum payment which I would have to raise privately or have the principal balance crammed down to the value of my property. I could not force a cramdown in a Chapter 13 because my HELOC is not entirely "under water." My first is with Citi and my second with Chase. If I can settle it how much do you think Chase would settle for in a lump sum payment? Any other ideas you have on this situation would be appreciated.

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Updated: Sep 19, 2014

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HELOC stands for Home Equity Line Of Credit. A HELOC is a secured debt unless the property that secured the loan is sold.

Bankruptcy

There are two basic types of bankruptcy available to consumers — Chapter 7 and Chapter 13.

A Chapter 7 bankruptcy, often called a “liquidation bankruptcy,” completely discharges many unsecured debts if you qualify to file. Most consumers who do not have significant assets or income choose to file for protection under Chapter 7 bankruptcy. Chapter 7 bankruptcy generally does not stop foreclosure action against consumers. The automatic stay ordered by the court when the case is filed postpones a mortgage company from proceeding with foreclosure. Since secured debts, such as mortgages, are not usually dischargeable in bankruptcy, the court or the trustee will usually grant relief from the stay to mortgage company to proceed with foreclosure if the homeownerÂ’s mortgage remains delinquent.

If the debtor stays current in their mortgage payments, and files a statement of intention regarding the property to retain it, the debtor can retain the property. This is called a debt reaffirmation. This is an agreement in which the debtor agrees to repay a debt even if it was or could have been discharged (i.e., forgiven) in the the bankruptcy proceeding. A debt reaffirmation agreement is legal if it is voluntary, made with or without the advice of an attorney, filed with the bankruptcy court, and approved in certain circumstances by the bankruptcy court. This is what you did.

A Chapter 7 bankruptcy would discharge any deficiency balance resulting from a short sale or deed in lieu of foreclosure. Alternatively if there is no short sale or deed in lie of foreclosure, a Chapter 7 would wipe-out any liability for the mortgage or foreclosure. As mentioned, when filing a Chapter 7, the debtor must file a statement of intention regarding the property. There are two options: Retain or Surrender. If the debtor selects surrender he or she must quit the property. Liability for the deficiency balance following the foreclosure and REO or auction would be discharged.

Another option is Chapter 13 bankruptcy. This is also called a “wage-earners bankruptcy,” and is designed for those debtors who own significant assets and have a regular income, but who cannot afford their monthly debt obligations. In a Chapter 13, the debtor makes payments to the bankruptcy court for a certain period, usually three to five years, until all of the petitioner’s debts are paid. If the consumer cannot afford to repay all of his debts within the time period specified by his Chapter 13 plan, any debts remaining after all payments are made are usually discharged, meaning the debt is “forgiven.”

Both Chapters 7 and 13 create an automatic stay when filed, meaning that the debtor’s creditors must cease all collection activity until the bankruptcy case is either finalized or dismissed, unless the stay is lifted by the court.

Recommendation

You do not mention if you are consulting with an attorney. If not, you risk not understanding the nuances of your state's laws, and your rights and liabilities. Ask an attorney what to do about the HELOC and see if it can be discharged in your bankruptcy. If you chose to do a lump-sum settlement, some creditors of a second mortgage or line of credit will accept a settlement of pennies on the dollar. Review Bills.com tactics for negotiating debts or refinancing a HELOC to learn more.

I hope this information helps you Find. Learn & Save.

Best,

Bill

Bills.com

2 Comments

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  • BA
    Jul, 2010
    Bill
    The upside to not reaffirming the first is if you are forced into foreclosure in the future you will have no personal liability for any deficiency balance. The downside is that the mortgage will not appear on your credit report. Regarding your question about the HELOC, you no longer have liability regarding the judgment. It is my understanding that junior mortgages are stripped from the property completely -- the lien no longer exists. Consult with your bankruptcy attorney regarding this matter, and return here to let me know if my assumption is correct.
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  • 35x35
    Jul, 2010
    Gary
    Bill, My wife and I filed Chapter 7 in Michigan last year. We currently are still in our home and are paying the 1st mortgage of which we have not reaffirmed (we are current on the payments). We have HELOC which we were delinquent on and the creditor obtained a judgment against us before we filed. I understand that the judgment has been wiped out due to the bankruptcy, but the lien is still attached to the property. We do not plan to reaffirm on the 1st mortgage, but we do plan to keep paying down the debt. Will the lien from the HELOC fall off after 3 years (satute of limitations in Michigan?) or will it remain attached? We did hire an attorney to perform the Bankruptcy and he advised not to reaffirm. If the HELOC is not affected by the stature of limitations I assume it will be collected upon when we sell in the future or can they possibly attempt a foreclosure after the 1st balance is paid down? If they attempted foreclosure (it has been over a year since we filed) the amount on the 1st would eat up all the sale money, so I am doubtful this would happen.
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