Can I Keep My Home if I Discharge a Home Equity Loan Through Bankruptcy?
Probably not, but the only way to know for sure: Hire a lawyer.
Question: I think I really screwed up. I owe almost as much as I earn on my credit cards, and before the pandemic, I took out a home equity loan. I thought I could handle it all, then the shutdown happened. My wife is out of work entirely and I had to take a furlough. I haven’t paid on that home equity loan, and I’m getting nasty letters.
We’re thinking about bankruptcy, and from what I can tell, that’s no problem for the credit cards. But what about the home equity loan? I keep hearing how bankruptcy lets you keep your house, but is that true even if I can’t pay back the home equity loan? The Internet is a wonderful thing, but it doesn’t give me a clear answer on this. I don’t know why.
– Paul in Georgia
Steve Rhode, The Get Out of Debt Guy, replies…
The reason the Internet isn’t giving you “a clear answer” is simple: There isn’t an easy one. But I can tell you the general rule…
Home equity loans are liens, and if you don’t pay, you can’t stay.
A less satisfying but more thorough answer is: It depends. On what? Where you live, for one thing. Bankruptcy and other debt protections are administered by the states — and you live in one of the worst for that, Paul.
The National Consumer Law Center ranks each state on how well it protects its residents against debt collectors. Six states got F grades last year:
- New Jersey
Another factor is where you got your home equity loan in the first place. Some lenders are more forgiving than others. They’ll patiently work with you on a repayment plan. Others will want to seize your house as soon as they legally can, so they can resell it.
What is a home equity loan, anyway?
Before we go any further, let’s review what happened when you took out that home equity loan. For something that sounds so simple, it can get a little confusing.