Quick Answer: After bankruptcy discharge, HELOC settlement is possible but lenders must agree in writing to clear the property lien, as bankruptcy eliminates payment obligations but not liens. The homeowner owes $126,000 total on a property worth $88,000, making strategic default on the second mortgage a consideration.
“Dear Steve,
I have a first motgage with Wells Fargo for $97,000 and a HELOC with Fifth Third for $29. My property value on Zillow is $88,000. I filed chapter 7 that was discharged in March 2009 and never reaffirmed either mortgage.
I was thinking of stopping the payment of my HELOC and continue to pay my first mortgage in hopes they will settle. I reached out to them for settlement but it went unanswered. I know I can walk away from my property free and clear but I would like to stay in my home. I know there is always a risk of forclosure but what do you think the chances are that the HELOC would settle after several missed payments? I can’t imagine them paying off the first mortgage and paying for the forclosure costs to lose money but I may be wrong. Also…if they send it to collections and I settle, does the collection company remove the lien?
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Dear Carla,
You may want to read Why It Makes Sense to Consider Debt Settlement for Second Mortgages and HELOCs for a broader description of the process.
The key to this process is to make sure the lender will put in writing they will clear the lien against the property if you settle. Bankruptcy eliminated your requirement to pay the mortgage or HELOC but did not extinguish the liens against the property. Unless you can get those cleared repaying or settling the old debts is a moot point.
But let’s say you do manage to get a HELPC settlement for $3,500. Just keep in mind that’s still going to leave you underwater on your first mortgage.
Before you give anyone, any money, you might want to negotiate with both lenders. It seems like the math doesn’t add up to settle the second alone if the first won’t budge.
More importantly, how much cash do you have on hand to settle the liens? If you need a coach to help you through this process you can look at getting help from
Please post your responses and follow-up messages to me on this in the comments section below.
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Hi Carla,
I can see where, if the second were settled and the lien removed, only paying on the first makes sense given the 10% underwater mark based on zillow. I would encourage you to get a brokers price opinion (BPO) in order to make more reliable calculations.
Depending on the numbers that come back on the BPO, you may find the purely dollars and “cents” approach of finding comparable housing for less than the payment on your first for a couple years more appealing.
It may take another 3 years before you would qualify for another home loan, but you may find you are further ahead financially taking this approach.
If you don’t mind my asking, why are you motivated to stay in the home?
Have you looked around to see what comparable houses in the area rent for?
Carla, just to be clear, I’m not an attorney, so the following is not legal advice. You should also discuss your situation with a local attorney who specializes in real estate matters.
As you already know the Chapter 7 took care of any deficiency balance that Wells Fargo might otherwise have been able to pursue you for, should the property ever be sold or foreclosed upon. So the entire point to a settlement would be for removal of the lien against the property. In other words, you should never pay a settlement on the HELOC unless is clearly states in writing that the lien will be removed upon clearance of your settlement payment. Also, please be aware that a HELOC settlement will potentially result in a taxable event, where the amount forgiven is reported on a 1099. Since this is a HELOC, the Mortgage Debt Forgiveness Act will probably not apply. You may, however, be eligible for relief under the insolvency exemption (see IRS Pub. 4681).
To your question, I can tell you that WF is unlikely to settle with you after only “several missed payments” on the HELOC. Every case is different, so it’s possible they may move more quickly in your case, but in general it is likely to take a *lot* longer than that, and there is no guarantee at all that they will settle. Even though it is very unlikely that they would foreclose either, given that there is nothing to recover, technically speaking you are at risk of foreclosure as long as you are not paying on the HELOC.
What I can tell you is that there seems to be a sort of “limbo” situation created when a person files Chapter 7, discharges any potential deficiency, but continues paying on the note. I have clients attempting the same process, and one of the problems is that the creditors take the position they cannot discuss an account that was discharged in bankruptcy, for fear they will be in violation of bankruptcy regulations in doing so. There is something of a “catch-22” involved. I’m not saying settlement is impossible in this situation, only that it is likely to require lots of patience and endurance, with no certainty on the result.
And as Steve correctly noted, a settlement on the HELOC still leaves you with an underwater property. This may or may not be a problem from your perspective.
And there is one danger I did not mention. There may be a concern over paying the mortgage after a bankruptcy and if that will cause the mortgage to be reaffirmed. You may want to discuss this with your bankruptcy attorney and ask for a specific advice if they have seen this in your area.