This is a very difficult concept for many people to understand. Several lawyer site profess having trouble getting clients to see the difference between a debt and its lien on an asset. As always, the best recommendation when dealing with foreclosures and / or bankruptcy is to discuss your situation with a lawyer in your state of residence. Bankruptcy and credit consumer protection laws and foreclosure laws can vary widely from state to state. Chapter 7 bankruptcy typically wipes out unsecured debt, any debt that is not a loan against a tangible asset, as in a car or house. In general, however, you still have to deal with secured debt as a part of a Chapter 7 bankruptcy. A secured debt typically has a lien on the asset, in this case a residence. In some way you must satisfy the first mortgage and any junior mortgages or lien holders before you can sell the home. A “home equity line of credit” or “HELOC”, is a junior or subordinate mortgage and lien to a primary. That means it has secondary or lesser priority than the first mortgage, but, it is still tied to the property. The Chapter 7 bankruptcy terminates your liability on the primary and the HELOC. However, it does not remove the lien that was posted against the property when the loan was given. A lien is a credit mark alert that a security interest by a lender was posted against the property to ensure loan payment and to insure any title check on asset transfer will show that a loan is still pending. The lien is recorded at the county recorder’s office in the town or region where the property is located. You cannot clean off a lien in a Chapter 7 bankruptcy. The only thing Chapter 7 does for you is to prevent the HELOC lender or other subordinate lien holders from suing you or pursuing you to pay on the loans. However, and this is the crux of this article, the junior lien holder retains its legal right to foreclose on the property. While Chapter 7 protects you personally from a lawsuit after filing for bankruptcy, your property has no protection from foreclosure in the future. This is what most people do not understand. Even if the lender is unlikely to foreclose when there is no equity in the property, the lien prevents you from selling without the lien holder knowing about it.
To illustrate the situation, say your house is worth $220,000, but you have a first mortgage of $260,000 and a second mortgage of $60,000. The second mortgage lender could force you to sell the house. But you get only $220,000, and have to give that to the first mortgage lender. This leaves nothing left over. That would be an ill-advised business decision. So, the junior mortgage can simply wait for the market to improve and for equity to accumulate in the asset. Foreclosure continues to loom in your future.
At this point, you likely have to negotiate with this junior lien holder. This lender knows that there is no equity in the house. You could try to work out a deal that would give the junior lien holder a reason to allow you to sell the property, and settle this debt.
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