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Overview
A HELOC is a word used for a home equity line of credit, often a secondary obligation of the homeowner after a first mortgage. Just like a first mortgage, it is collateralized by the lender who takes a lien against the real estate. If the homeowner has sufficient equity in the real estate to pay off both the first mortgage and the HELOC, then the amount owed under both is not dischargeable if the homeowner files for bankruptcy and it will be paid from the proceeds of the sale of the real estate. However, any amount he owes in excess of the equity would be included among the unsecured obligations and will be subject to being discharged.
Significance
Many homeowners who run into financial difficulty try working with their first mortgage lender to find ways to keep from having to face foreclosure on their property. Little attention is paid to a HELOC if one's financial difficulty affects payments due on it, as well. If both agreements are with the same lender, most likely both will be considered by the lender in working out an arrangement. However, if the HELOC is with another lender, the borrower's real estate can be foreclosed upon just as easily for overdue payments.
Time Frame
When a homeowner runs into financial difficulty, it behooves him to contact both the holder of his first mortgage and his HELOC to find ways to forestall foreclosure. Once either lender begins the foreclosure process, it becomes more difficult for the borrower to make such arrangements, and most likely he will have little choice but to file bankruptcy. This is particularly true of out-of-town lenders, or institutions that have purchased the mortgages from the originator.
Geography
Homeowners in Florida and California experienced rapid appreciation in the equity of their homes in early and middle part of this decade. Many decided to tap that equity by applying for a HELOC. Soon thereafter, both states saw a rapid depreciation in home values at the same time that unemployment rose to unprecedented levels. This condition caused many people to approach their lenders for help. Many have filed for bankruptcy because their first mortgage and their HELOC exceed the value of their homes.
Considerations
Declaring bankruptcy is a big decision. While a foreclosure will remain in your credit report for as many as 7 years, bankruptcy will remain there for about 10 years. Both foreclosure and bankruptcy will most likely lower your credit score, which will make it more difficult for you to obtain credit in the future. Before making such a choice, you should talk with an attorney or other adviser.
Potential
In a difficult economy, more people will face foreclosure and bankrupcy because of falling real estate prices and job losses. To some, either or both can be inevitable because there is no solution to their problem. Others can forestall both by repairing their credit score while working with their lenders to arrive at a solution.
