As an Asheville bankruptcy lawyer, I’ve been seeing more and more potential clients consult with me about their equity line balloon payments. Many times, bankruptcy can help a budget work better after one’s mortgage costs increase.
The first step in assessing a client’s rights is to figure out what happens at the end of the ‘interest-only’ portion of their equity line (usually ten years). In many cases, the terms of the original equity line agreement dictate that the interest only payments will automatically convert to a principal and interest payment amortized over another 10 year period. Read more about that in this New York Times piece from February 10, 2014, “Repaying Home Equity Loans.”
In bankruptcy, potential clients have several options if their new equity line payments are going to throw their budgets out of whack.
Stripping a Home Equity Line in Chapter 13
In a Chapter 13 bankruptcy, an equity line can be ‘stripped,’ with monthly payments being significantly reduced. The key ingredient to this budget solution is being able to prove that the value of the home is less than the balance of the first mortgage. This often solves the problem of balloon payments escalating or of a full balloon payment being demanded by the lender.
Eliminating Other Debt in Chapter 7
In Chapter 7 bankruptcy, we can frequently eliminate other types of debt not associated with the home. By doing so, more of a client’s monthly budget can be spent on their house payments.
Surrendering in Chapter 7 or Chapter 13
Lastly, if the home has become unaffordable, we can frequently eliminate liability on the mortgage by surrendering the property back to the lender in Chapter 7 or Chapter 13. By doing this, a client can achieve a ‘fresh start,’ without having to be concerned about arranging for a short sale or bringing a check to the closing table. A properly filed bankruptcy case can eliminate the ability of the lender to sue for any deficiency – all they get is the home.
Figuring out a sound financial plan can be stressful. It’s best to seek professional advice before making big decisions. For those of your in Western North Carolina, I would be pleased to sit down with you in a confidential, free, initial bankruptcy consultation.
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