If somebody takes a HELOC or some kind of debt instrument designed to collaterlize their home, and successfully doing that, obtains a line of credit (which is secured by the house) and purchases toys, vacations and such, does that person now have secured or unsecured debt as the instrument used was a “Visa” credit card attached to the line of credit ?
If that were the case, would this not be a totally different type of debt in the eyes of the new bankruptcy laws ? Since it was a “Credit Card” purchase, would this preclude someone from declaring the “homestead” feature available to keep their home ?
Kind of difficult to say, but anybody understanding my line of question here, please expound
The “homestead” document that some people file at the county recorder will not prevent them from losing their house.During the BK proceedings…….. errrrrrrr fraud attempt,the lender will file a “Relief From Stay”.More often than not the lender will be granted a relief from stay,and the foreclosure process will start or continue from where it was stopped by the BK filing.
The reason that a lender would be granted “Relief from Stay” is due to the homeowner not doing what they are required to by BK court,or not HONORING their court approved plan to get themselves out of bankruptcy(what a surprise……..).
They will lose their house. HELOCs are secured by the home, either by a deed of trust or a mortgage, depending on the state.
Under federal law, if the debtor cannot pay the creditor gets the house, and the debtor gets whatever is left over after sale expenses and loan payoff. Court proceedings can delay but cannot cancel the debt. To get out of it, the debtor would have to prove that the lender did not provide certain required disclosures under federal law (rescission, Reg Z), or qualify under various state laws. But the vast majority of people have no valid legal claims.
I believe CA does have a law cancelling overages. I.E., if the person ended up owing more than the house was worth, all the creditor would get was the house. I’ll have to look it up. A couple other states have statutes highly favorable to homeowners in this situation.
Paradoxically, a homeowner in way over their head (more loan than house value) might do better with a second-lien home equity or HELOC. You normally need to be under 10% or so. The creditor might deal because the first mortgagee is going to get almost everything, so it is better to work something out to get more on balance.
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