Three Reasons Why You Shouldn’t Get A Home Equity Loan To Avoid Bankruptcy

January 19th, 2010 by Reed Allmand

When it comes to money troubles, friends and family are full of advice.  One of the worse pieces of advice given to debtors considering bankruptcy is to get a home equity loan.  That could be a big mistake.  Here a few reasons why getting a home equity loan to avoid bankruptcy might not be the right move for you:

1. Typically, you can’t use debt to get out of debt. Anyone who has filed bankruptcy can attest to that truth.  For most debtors considering bankruptcy, their financial troubles are caused by two problems, 1) lack of income and 2) too much debt.  Getting a home equity loan would only worsen the second part that problem and move you closer to bankruptcy despite your best efforts.
2. Taking out a home equity loan could also be the first step towards foreclosure.  This can be one of those situations where trying to avoid one situation puts you right into an even worse situation.  Debtors who think they can avoid bankruptcy by taking out a home equity loan often find that they can’t pay back the loan or the mortgage and end up facing foreclosure and bankruptcy anyway.
3. Since a home equity loan is considered a secured debt, you won’t be able to discharge it in bankruptcy like credit card debt.  A home equity loan works like your mortgage in that it is secured by your home.  If you don’t pay the loan, they can foreclose. In bankruptcy, if you want to keep your home, you must pay the home equity loan and your mortgage.  But fortunately, you do have the option to surrender the home in bankruptcy, which will release you from the obligation to repay the loan.