Minnesota homeowners with bad debt should use bankruptcy to avoid home equity loans.
As Minnesota bankruptcy attorneys, we’re bound to say that though, aren’t we?
But here’s why.
MINNESOTA LAWS ARE VERY FAVORABLE TO HOMEOWNERS
In Minnesota, it is almost impossible for a debt that isn’t a mortgage to take your home.
The Minnesota Homestead law says that unsecured debts or judgments do not attach to a Minnesota homestead unless there is more than $390,000 in equity in the homestead.
This means that something like a credit card, judgment, medical bill, or student loan cannot seize your house for debt payment.
It also means that Minnesotans can keep their houses if they decide to file bankruptcy. This is true even if you use bankruptcy to discharge $50,000 or more in debt.
BORROWING AGAINST YOUR HOUSE MEANS TAKING ON MORE DEBT
Refinancing your mortgage or taking out home equity loans against your house to consolidate or settle debts is taking on more debt.
- It means that you are borrowing more money against your house than you owed earlier, and using it to pay other debts.
When is it a good strategy?
This is a good strategy if you have lots of assets and income and want to save a little bit on interest while you pay down your unsecured debt.
When is it a bad strategy?
This is a bad strategy if your budget is stretched already and it is hard to make the minimum payments.
What about interest rates?
Because mortgage interest rates are higher than they were in the last few years, if you add to the balance of your mortgage, then you will pay a higher interest rate on the mortgage loan than in the past.
This is particularly dangerous now as home equity loans usually have adjustable interest rates. Because interest rates are continuing to increase, your house payment for a home equity loan will continue to go up.
As a borrower you are not allowed to adjust the rate on an adjustable interest rate loan, only the bank or mortgage company can change the rate. The bank will most likely not be willing to work with you on the interest rate if you get into a rough spot.
Thus, if you borrow against your house by refinancing the mortgage or taking a home equity loan, you are taking on more debt at an interest rate that you cannot control.
It is true that the mortgage rate will be lower than a credit card interest rate, but the big difference is that this higher house payment could cause you to lose your home or have a higher house payment.
WHY IS BANKRUPTCY A BETTER WAY TO HANDLE DEBT THAN BORROWING AGAINST YOUR HOME?
- Because Minnesota law has such good protections for homeowners in bankruptcy, you can file bankruptcy on any unaffordable debts instead of borrowing more money to pay them
- In bankruptcy most unsecured debts, except for student loans, child support, and recent taxes get discharged completely
This means that you don’t owe them anymore, and don’t have to make any payments on them
If you are already living paycheck to paycheck, then you do not want to increase your house payment by borrowing against the house.
- Your house is at risk if you have any sudden expenses, or a loss of income or hours at work.
What about your credit rating?
The downside to filing bankruptcy is that your credit rating gets worse for a few years, but this matters less to homeowners than to other people.
Why is that?
- Because credit rating matters most when you go to buy a car or a house with a loan
Homeowners already have a house, so they probably won’t need to buy another house in the 2 years that it takes your credit to improve.
It is true that bankruptcy stays on a credit report for 7 to 10 years, but FHA ignores it for mortgage qualification after 2 years, and your credit score starts improving immediately after filing under either Chapter 7 Bankruptcy or Chapter 13 Bankruptcy.
This happens because the bad things in your financial situation that lower your credit all stop happening:
- No more late payments
- No more collections
- No more judgments
- A better debt to income ratio and a lower utilization rate
If you would like a free, no obligation meeting with one of our licensed Minnesota attorneys to discuss whether a home equity loan or a bankruptcy is a better way to deal with your debts, then fill out our contact form on the right side of this page, or call us at (612) 824-4357.