HELP, MY HELOC IS RESETTING!
What is a HELOC?
A HELOC, or Home Equity Line of Credit, is a loan tied to the value of your home. It’s like your mortgage but wasn’t used to buy your home. Many people took out a HELOC a decade ago to improve their home, buy a car, or pay for a child’s college. Many HELOCs only required the payment of interest for the initial term, but once reset, they require you to pay back the principal plus interest
Many home owners are facing an increase in payments. That, in addition to their regular mortgage payments, they just won’t be able to afford each month. Those additional amounts taken together with their regular mortgage payments result in total payments which simply are not affordable.
There are some ways to use bankruptcy protection to handle a resetting HELOC!
1. Planned Home Sale Using Chapter 13
What is it?
A Planned Home Sale is a way to stop a looming foreclosure sale, try to get as much for your current home as you can, and use some of that saved equity to purchase a new home. This can be the ideal way forward for those facing a reset of their home equity line of credit (a “HELOC”) and a new monthly payment for their home that they just can’t afford. A Chapter 13 Planned Home Sale may allow you to protect much of the equity you’ve built up in your home. The National Association of Realtors reports that foreclosed properties sold for an average of 15% below market value ( A planned home sale may allow you to avoid that loss.
But what if you could stop that looming foreclosure and could try to get the most from the sale of your home? With the proper time spent marketing the home, a planned sale may just put some money in your pocket or can serve as a down payment on a new home.
What do I need for a Chapter 13 Planned Home Sale?
First you need to have equity in your home, what that means is that your home’s value is greater than the amount you owe on your first mortgage and the HELOC. Second, you need regular income. If you’ve got equity plus a regular income, a Chapter 13 Planned Home Sale may be the best option to get out from under ballooning payments that you otherwise just can’t handle.
Why would I choose a Chapter 13 Planned Home Sale?
A Chapter 13 Planned Home Sale offers four main benefits that make it the best option for letting you, not the bank, sell your home.
First, you keep possession of the property and stop the looming foreclosure. With your equity and your plan to maximize the sale price, we may be able to keep you in the home until the sale goes through.
Second, you keep control of the property, so the sale of the home is controlled by you, not the bank. All they want is the amount of the loan, but what you want is the loan amount AND to get as much of your equity out as possible.
Third, we can market the property to get the best sale price possible. A rush to sell just lowers the price of the home, with the proper advertising and listing, you are more likely to get the most for your home.
Fourth, you can take the equity you’ve kept from the sale of the home to reinvest in a new property. Use the equity you’ve just saved as a downpayment on a new home that fits your needs.
After the sale, you can continue with the Chapter 13 plan or, if possible, we can convert to a Chapter 7 and discharge many of your other debts. For those facing foreclosure or ballooning payments you just can’t afford, a Chapter 13 Planned Home Sale can be the right choice to make.
What if I Don’t have Equity in my Home?
If you don’t have any excess equity in your home, the Chapter 13 Short Sale or Lien Strip may be the best options for you!
2. Short Sale Using Chapter 13
What is it?
A Chapter 13 Short Sale is a way to stop a looming foreclosure sale due to unaffordable payments from a resetting HELOC. It can also help to avoid having forgiven or cancelled debt considered as income by the IRS and getting hit a second time at tax time for “income” you never saw.
What is that about taxes?
The IRS counts debt that is forgiven as income, so when many people sell their houses through a short sale, they can get an unexpected tax bill for the amount of the loan that was forgiven through the short sale. ( A major exception to this rule is if the cancelled debt was due to a bankruptcy filing. The Mortgage Forgiveness Debt Relief Act that prevented so many from having to face this problem ended in 2014.
Debt forgiven or cancelled by a lender after January of 2015 will once again be considered as income by the IRS! That means that in the next tax year, you will have to pay taxes on the amount that was forgiven.
How Does a Chapter 13 Short Sale Avoid the Taxes?
Debts discharged in bankruptcy don’t get counted as income. The Chapter 13 Short Sale is set up so that we use the time allowed under the bankruptcy plan to market the home to try and get the best price. With this leverage, we will attempt to get your lender to approve the short sale.
Where in a normal short sale, the lender would then state they are forgiving or canceling the amount of debt that remained after the sale, leaving you with a tax bill next April, we work to discharge it either in the Chapter 13 plan or by converting to a Chapter 7.
Why would I choose a Chapter 13 Planned Home Sale?
A Chapter 13 Short Sale offers four main benefits that make it the best option for letting you, not the bank, sell your home.
First, you keep possession of the property and stop the looming foreclosure. You can use this time to find a new place to call home, while the sale of the property is arranged.
Second, we can market the property to get the best sale price possible. Your lender is more likely to approve a short sale if they can see that the sale will bring more than in a foreclosure.
Third, we will attempt to negotiate that the short sale will not include the cancellation of debt.
Fourth, after the short sale, we can either dismiss the Chapter 13, and file an immediate Chapter 7 or convert the case to a Chapter 7 – discharging you of the uncancelled debt from the short sale, and avoiding the IRS counting it as income.
If you’re facing foreclosure or ballooning payments due to a HELOC reset, and you simply can’t afford the payments, a Chapter 13 Short Sale can be the right choice to make and makes financial sense.
3. Lien Strip Using Chapter 13
What is it?
In Chapter 13, if you’re underwater on your first mortgage and have a HELOC, we can attempt to take that HELOC and make it so that it is no longer secured by your home. Then it’s just like a credit card debt or medical bill and can be discharged in bankruptcy. This is ideal for those people that may be underwater on their home now but are able to handle the monthly mortgage and want to stay in their home.
What do I need for a Chapter 13 Lien Strip?
If you have regular income, most likely you would qualify for Chapter 13 relief. We then propose a plan that complies with the legal requirements and ask the court to determine that the HELOC is no longer secured by your home.
Why would I choose a Chapter 13 Lien Strip?
A Chapter 13 Lien Strip allows you to take away the lenders right to collect on the HELOC by foreclosing on your home. In fact, once the HELOC is stripped of your home, you can have that debt discharged in bankruptcy.
If you want to keep your home and the first mortgage is manageable, a Chapter 13 Lien Strip can be the right choice to make.