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I Filed Bankruptcy But the HELOC is Still on My House

Question:

Dear Steve,

Had a bankruptcy in 2010. At first, it was to discharge everything then it was changed. The house was going into foreclosure with a 2nd HELOC. We walked away and left.

Then 10 months later and negotiated with the 1st and got back in. We thought the 2nd was discharged.

In 2020 we learned that the 2nd was still there. We went to the bank and inquired. The person said that the loan was written off, it was not incurring interest, and that we needed to contact the collection dept. I sent them an email a couple of times but they have never responded. Kentucky has a 15 year SOL for property liens.

How can I get the bank to discuss a settlement?

Chris

Answer:

Dear Chris,

These are often situations that confuse people. You should always seek the opinion of a real estate or bankruptcy attorney licensed to practice law in Kentucky if you want a legal opinion.

A Chapter 7 bankruptcy will eliminate the obligation to repay the loan but does not clear the lien from the property. HELOC lenders have little interest in foreclosing on a valid lien unless there is enough equity in the property to make it worthwhile since they will have to pay off the first mortgage following a foreclosure sale.

If you owed more on the house than it was worth, a Chapter 13 bankruptcy might have been able to strip some or all of the HELOC lien off the property if the bankruptcy was completed and discharged.

“On June 1, 2015, the Supreme Court of the United States held in Bank of America, N.A. v. Caulkett that a debtor (bankruptcy filer) cannot strip off a junior mortgage lien in a Chapter 7 case. You can view the case here.

If you file for Chapter 7 bankruptcy, you cannot get rid of second mortgages, home equity lines of credit (HELOCs), or home equity loans. Filers in the Eleventh Circuit Court of Appeals, are no longer able to strip off (remove) these types of liens in Chapter 7 bankruptcy.

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So the situation you are left in now is there is a valid lien against the property, that you are not obligated to pay, but to get a clear title to the property the lien will have to be satisfied.” – Source

You can certainly approach the lien holder, which might not be the bank that held it before. But understand, you have limited bargaining power unless you are prepared to come to an agreement with the current lien holder to satisfy the lien in one or a series of payments. Alternatively, you could pursue resuming payments on it towards satisfaction.

If you’d like to discuss your particular situation in detail with a debt coach which can assist you, contact my friend Damon Day. He is an incredible debt advisor for people in difficult spots just like yours.

Sincerely,


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Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.
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