A common way you could get out of debt when there is a good housing market is by borrowing against your house by refinancing your mortgage or taking out a home equity line of credit (HELOC).
These strategies allow people to take out a new loan to pay off their existing loans.
They often allow the borrower to save a little bit on the interest rate because the bank can take the borrower’s house if the borrower doesn’t pay.
Banks market these loans very aggressively and love to make them.
However, you need to know:
- Are they a good idea for you?
- Are they better than filing bankruptcy?
HOW DOES A HOME EQUITY LINE OF CREDIT OR REFINANCE WORK?
The basic trade off when borrowing against your house is that with these loans, the borrower pledges their house to cover the debt, but gets a lower interest rate.
Remember:
- Taking out a second mortgage or refinance your house, you are risking your house to pay debts that would be discharged in bankruptcy
- Increasing the loan balance against your house means you are also increasing your mortgage payment for many years or even decades
- Borrowing against your house or refinancing to take out cash to consolidate the debt, your bank will increase your interest rate on the entire mortgage, not just the new loan
This is a pretty big risk just to save a few percentage points in interest.
WHY BANKRUPTCY IS A BETTER SOLUTION FOR HOMEOWNERS
Bankruptcy, on the other hand, lets you keep your house and doesn’t increase the loan balance against it.
Bankruptcy actually lowers your payments every month, because it discharges the credit card debt instead of borrowing more money to pay the old debt.
Discharge means that you stop owing the debt.
If you file bankruptcy, then you stop making debt payments and the loan balance against your house stays the same. The interest rate does not increase either.
So why do people avoid bankruptcy?
The big reason why most people avoid bankruptcy is because they are worried about their credit rating.
This is not very sensible because the one moment in life when you really need your credit rating is when you go to buy a house.
If you already have a house, then you don’t need to buy another house for some time.
Your credit rating usually recovers to a 700 only 2 years after filing bankruptcy, so it is a temporary drop in credit score.
- Most of my clients actually see their credit score IMPROVE after bankruptcy
This actually makes perfect sense because bankruptcy means that you have less debt.
Less debt usually means a better credit score.
My clients often:
- Can buy a house with a new mortgage only two years after filing bankruptcy
- Get offers for new car loans within weeks of filing bankruptcy
Bankruptcy really is a fresh financial start.
Conclusion
If you’re contemplating a HELOC because you’re struggling with debt, then why not see if filing for Chapter 7 Bankruptcy or Chapter 13 Bankruptcy is a better idea.
Speak to an experienced Minnesota Bankruptcy Attorney today at 612.824.4357 to tell us what you need us to do.
Alternatively, why not fill out the Free Evaluation Form to see whether bankruptcy is right for you?
