Home Equity Loan Defaults

Many homeowners take out loans against their homes to use as they need it.

These loans, or lines of credit (HELOCs) are usually offered with very low, adjustable interest rates, or even interest-only payments, making them even more attractive.

However, the terms for most of these loans have an end date:  A time when the interest rates rise or the minimum payments increase to include principal as well as interest.

Most don’t take out the full credit line all at once.

They use it slowly, over a period of years, to help them pay their bills, purchase necessary (and sometimes unnecessary) items, and basically enjoy life.

Sounds great, but it doesn’t last.

Eventually the terms of the loan mandate increased payments.

According to a recent Los Angeles Times article, it is likely that many will be unable to make these new payments and a lot of defaults will occur, particularly in California.

What Happens When You Default?

When you default on a loan secured against your home, the lender has the right to commence foreclosure proceedings to sell your home.

This can occur unless you are able to make arrangements to catch up on the missed payments, or get a new loan that pays off the prior one (hopefully on terms you can afford).

As the graphic at the top of this article indicates, most people choose to take one of several options, the results of which are not always guaranteed or particularly appealing.

Getting a new loan would require that there be more equity in your home, which means its value must have risen.  It also assumes you have good enough credit to get the loan, as well as sufficient income to pay on it.

Loan modifications can work, but lenders do not always allow them.

Getting additional income to pay the higher amounts is a possibility for some, but not all, and is probably not the optimal solution.

There is, however, one important tool that the above graphic and many like it fail to include.

Perhaps that is because for some reason people would rather lose their home than even consider it (despite the fact that in reality there is very little downside to doing so).

I’m talking about filing a bankruptcy case.

Specifically, Chapter 13 (or Chapter 11 if your debts are above the Chapter 13 limits)

What To Do if You Fall Behind With Payments 

If you fall behind on your payments and are unable to reach an agreement with your lender to catch up, your lender may decide to foreclose on (sell) your property to satisfy the debt.

You can, of course, still try to restructure or refinance the loan, but the clock is ticking and unless you reach an ironclad resolution with the lender, you could lose your property.

You are looking at a prime scenario for filing a Chapter 13 bankruptcy case.

Chapter 13 Allows Time to Catch-Up

In a Chapter 13 bankruptcy case. your lender can be forced to accept payments on the past due amounts over a period of up to 60 months.

During this time you must stay current with all ongoing payments on the loan that come due each month, but you can continue to pursue other options such as loan modifications, refinance, etc.

This is a really powerful tool.

Chapter 13 can also eliminate various unsecured debts that you have.

It can sometimes also completely remove HELOCs and other junior liens from the property altogether, depending on the value of the property.

But the big positive as far as this article is concerned is that you can stop the foreclosure and at the very least force your secured lender to accept payments to cure your default over time while keeping control of your property and your life.

See more information on Chapter 13

Examine All Options

So if you find yourself faced with the problem of being unable to make your home equity loan, or any other payments, it’s a good time to avail yourself of the free initial consultations most bankruptcy attorneys offer.

You may find a very affordable and beneficial solution to your financial issues.

Image Courtesy of Trulia