Some people file for bankruptcy when they cannot afford their mortgage payments in a bid to stay in their house while they sort out their debt problems. However, if you have mounting debt but have already paid off your mortgage, be sure you do not endanger your home by taking out a second mortgage or a home equity loan.
In an effort to stave off bankruptcy, some homeowners tap into their home equity to pay off their outstanding debts. That might seem like a smart move, but it carries significant risks.
Your house is on the line
When you take out a home equity loan or a home equity line of credit, you put your house up as collateral. This means you must make your payments to your bank on time. If you fail to supply payments as your schedule dictates, your lender can foreclose on your home.
Longer repayment periods increase risk
Home equity loans and HELOCs often have repayment terms of 10 years or more. This extended timeline raises the chances of something going wrong, such as a job loss, medical emergency or other financial hardship that makes it difficult to keep up with payments.
Your home value could drop
If the value of your home decreases, you could end up owing more on your mortgage and home equity loan or HELOC than your home is worth. This “underwater” situation could make it harder to sell or refinance your home if the need arises.
Bankruptcy may better handle your debt
Given the long repayment period involved with using a home equity loan, going through Chapter 13 bankruptcy could be a more prudent option since a repayment plan only lasts for three to five years. Also, if your home equity loan proves financially burdensome, you may have to file bankruptcy anyway.
Jeopardizing your home should not be necessary to alleviate your debt. Bankruptcy options can allow for the discharge of debt and even protection of your primary residence from creditor claims.
