Are You at Risk of Defaulting on Your Home Equity Line of Credit? If so, You’re Not Alone, and Ch. 13 Bankruptcy Protection May Be an Option for You
by Matthew Grech | Jun 10, 2015 | Article |
According to a recent study by the credit reporting bureau Experian, approximately $265 billion in Home Equity Lines of Credit (“HELOCs”) will be entering into repayment periods in the next several years, and as such, consumers may see their monthly payments spike, in some cases, to triple or quadruple what they previously were paying. For some, these increased payments may simply be too much, and thus they can lead directly to defaulting on their HELOCs.
In order to better understand the current issue, it perhaps may be helpful to provide a quick history lesson. Prior to the Great Recession of 2008 (“Recession”), HELOC loans were relatively simple to obtain, and as such, many homeowners understandably took advantage of this method of obtaining cash. Then came the Recession, and home equity effectively disappeared overnight. However, before this great disappearing act, HELOC loans reached their peak between 2005 and the beginning of the housing crisis in 2008, and because many HELOCs generally enter into their repayment phase after 10 years, these billions of dollars are just now coming due. As such, many experts believe that HELOC defaults are on the verge of skyrocketing, thus leaving homeowners with a limited set of options to save their homes.
First, a homeowner can simply absorb the new increased monthly payment. However, for the average homeowner, this is not so simple. For example, according to a recent study by the Federal Reserve, the surprisingly small sum of $400.00 in unexpected costs would put nearly half (47%) of all Americans into a position that would require them to sell something, borrow money, or skip other payments to cover it. As such, for many, absorbing the new increased monthly payment is simply not an option.
The next two options involve the cooperation and consent of the lender and thus can be problematic. First, a homeowner can attempt to refinance her HELOC. However, in order to accomplish this objective, the homeowner must have sufficient equity in her property and possess good credit. As one can see, these can be insurmountable barriers for many homeowners to overcome. Next, a homeowner can attempt to modify the terms of his HELOC. Modifications can be problematic due to the fact that there are qualification guidelines that a homeowner simply may or may not satisfy, and if left unsatisfied, the HELOC cannot be modified.
The ultimate problem with the refinance and modification models is that they are not subject to negotiation, as the final decision-making power lies solely with the lender. The obvious problem with these options is that they are not realistic for those homeowners who do not have sufficient equity, good credit and/or meet the underlying modification guidelines.
This leads us to our final option for homeowners who are faced with HELOC repayments that they cannot afford, which is filing for Chapter 13 Bankruptcy protection. Chapter 13 provides the borrower with something that the other options do not, and that is leverage. In other words, by filing under Chapter 13, borrowers all of a sudden find themselves in the unique position of unilaterally setting forth the terms of repayment to the lender, with certain limitations.
Specifically, for those borrowers who are delinquent with their HELOC payments and may be facing a foreclosure, a Chapter 13 allows borrowers to stop a foreclosure sale and become current with the delinquent payments. Further, and just as importantly, those borrowers who satisfy certain requirements may in fact be able to strip, or void, the HELOC altogether without paying back the delinquent payments and/or the remaining balance.
The filing for Chapter 13 Bankruptcy protection should not necessarily be viewed as an entirely negative thing, but rather, as a tool whereby borrowers can gain more of an equal footing with the lenders and thereby workout an equitable solution in regard to their HELOC problems.