Your bank will close your home equity line of credit to further charges or withdrawals if you file for bankruptcy. You must disclose all debts and credit lines during the bankruptcy application, and the official notice of your bankruptcy filing will be sent to all of your creditors, including the lender on the home equity line. During bankruptcy you may have options for eliminating any balance on your home equity line while keeping your home and first mortgage.
Protecting The Bank
A lender aware that you are filing for bankruptcy will move quickly to protect the bank's interests by closing the account. The credit agreement that you signed gives the bank the right to modify your credit line at any time, and banks routinely reduce or close credit accounts.
The Automatic Stay
A provision in bankruptcy called an "automatic stay" prohibits the lender from taking further action. An automatic stay is a legal injunction signed by a federal judge. It prohibits all of your creditors from collecting from you while you are under the protection of the federal bankruptcy court. Without that protection, a lender aware that you are having financial problems could close your home equity line and demand that you pay any outstanding balance in full if you have been missing payments on the home equity line. If you refuse, the lender could declare you in default of the home equity loan agreement and begin foreclosure proceedings.
Upside Down
The Bankruptcy Law Firms website reports that in some instances you can keep your home and home equity line during a Chapter 7 bankruptcy through the use of exemptions for retaining a primary residence. However, the lender may not allow more charges on the home equity line after you emerge from the bankruptcy. On the other hand, Chapter 13 can allow the home equity line to to be discharged, or eliminated if the market value of your home is less than the balance on the first mortgage. That situation is considered being "upside down" or "under water" on the mortgage because you owe more on the home than it is worth. As a result the home equity line is treated as an unsecured debt because of the absence of equity. Chapter 7 and Chapter 13 are the most popular forms of personal bankruptcy, with Chapter 7 allowing you to shed credit card and other debt within just a few months. Chapter 13 requires a payment plan of three to five years and then unsecured debt is eliminated.
Legal Help
All forms of bankruptcy can be complex and confusing for people inexperienced in such matters and the U.S. Bankruptcy Courts strongly recommends that you hire an experienced bankruptcy attorney to handle your file. You are allowed to file for bankruptcy on your own, but the potential for procedural errors increases if you handle the case yourself. The bankruptcy judge can dismiss the case if you make mistakes and that would allow the automatic stay to end.
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