A few years ago when people purchased homes and those homes increased in values the banks offered the homeowners an equity line of credit, which was a way to borrow against the home.  These equity lines of credit ranged from just a few thousand to several hundreds of thousands, depending on the valuation of the home.   When the homeowners obtained an equity line of credit they are basically obtaining another mortgage on the home and they must continue to pay on the equity mortgage.  So a question I receive is what happens when a homeowner, who has an equity line of credit, files for bankruptcy.  Here are a few scenarios:

Filing Chapter 7 and surrendering the home:

If a debtor is filing for chapter 7 bankruptcy in Florida and is surrendering the home then the debt of the mortgage, including the debt of the home equity line of credit will be discharged in the bankruptcy.  HOWEVER if the debtor took out a significant amount of money with the home equity line, the bankruptcy trustee will question the debtor to determine what the debtor did with the funds.

Filing a Chapter 7 and retaining the home:

If the debtor chooses to file a chapter 7 bankruptcy and is retaining the home, then there is nothing that can be done with the equity line of credit.  The equity line of credit will not be dischargeable and the debtor must continue to pay on the equity line of credit or they could potentially be foreclosed on.

In Florida a debtor is not allowed to strip off a second mortgage or an equity line of credit in a chapter 7 bankruptcy filing.

Filing a Chapter 13 bankruptcy and retaining the home:

If a debtor chooses to file a chapter 13 bankruptcy in Florida then he or she has the ability to strip off or wipeout the second mortgage and or home equity line of credit on their residence.  In order for a debtor to strip off the second mortgage he or she must show that the value of the first mortgage exceeds the value of the home.  Example:

House 1 – value $240,000

First Mortgage – $300,000

Equity line of Credit – $100,000

In the case above the debtor would be able to strip off the equity line of credit because the value of the first mortgage exceeds the value of the home.

House 2 – value $240,000

First Mortgage – $200,000

Equity line of Credit – $100,000

In the case above the debtor would not be able to strip off the equity line of credit because the value of the home exceeds the value of the first mortgage.

Filing a Chapter 13 and surrendering the home:

If a debtor is filing for chapter 13 bankruptcy in Florida and is surrendering the home then the debt of the mortgage, including the debt of the home equity line of credit will be discharged in the bankruptcy.

If you have a home equity line of credit and are thinking of filing for bankruptcy and would like to schedule a free consultation with a local bankruptcy lawyer then please contact Shmucher Law, PL by calling 305.741.5553 or 954.309.5559.  We offer free consultations in any of our office locations including Boca Raton, Fort Lauderdale, Miami, Plantation, and Sunrise Florida.