Bankruptcy is a Better Option Than Borrowing Against Your House to Pay Debt

A common people attempt to get out of debt is by borrowing against your house by refinancing your mortgage or taking out a home equity loan or home equity line of credit (HELOC).

This allows people to take out a new loan to pay off existing (higher interest) loans.

One primary benefit it this allows the borrower to save a little bit on the interest rate because rates on home loan are typically lower than rates on unsecured loans and credit cards.

Banks love to make home loans.

Before borrowing against your home, ask yourself:

• Is this a good idea for me?
• Am I better off filing bankruptcy?

How Does a Home Equity Line of Credit or Refinance Work?

The general idea when borrowing against your house is that with these types of loans, the borrower pledges their house to cover the debt, but gets a lower interest rate.

Remember:

• When you borrow against your house, you risk your house to pay debts that may be discharged in bankruptcy (some debts cannot be discharged in bankruptcy);
• When you increase the loan balance against your house you also increase your monthly mortgage payment for many years or even decades; and;
• Borrowing against your house to pay off other debt will increase the interest rate on your entire mortgage, not just the new loan. This has never been truer than today with home loan interest rates the highest they’ve been in decades!

This is a big risk just to save a few percentage points in interest.

Why Bankruptcy Is A Better Solution For Homeowners

Bankruptcy, on the other hand, allows you the opportunity to keep your house and it does not increase the loan balance against it.

In reality, bankruptcy lowers the totality of your monthly payments, because it eliminates credit card and most other debt, instead of borrowing more money to pay the old debt that then cannot be discharged in a bankruptcy.

Discharge means that you stop owing the debt.

If you file bankruptcy you stop making unsecured debt payments and the loan balance against your house stays the same.  The interest rate does not increase either.

Why Do People Avoid Bankruptcy?

The main reasons why most people avoid bankruptcy is because of the perceived stigma of it and concern about their credit score.

These are not good reasons to avoid bankruptcy.

First, bankruptcy can be a private matter between you and your attorney. In most scenarios, no one will ever know you filed.

If you’re in financial distress, your credit score is likely down anyway. Bankruptcy can help improve your credit score in the long run because you’ll have eliminated your debt. Less debt usually means a better credit score. Credit scores usually recover to a 700 or better within 2 years after filing bankruptcy.

Also, most people only need good credit to buy a house. If you already have a house, then you don’t need to buy another house in the immediate future. 

Most people who file bankruptcy:

• Can buy a house with a new mortgage only two years after filing bankruptcy;
• Get offers for new car loans within weeks of filing bankruptcy.

Bankruptcy provides a fresh financial start.

In Conclusion

If you’re contemplating a home refinance or HELOC because you are struggling with debt, you would be wise to speak with an experienced bankruptcy attorney to see if filing Bankruptcy is a better financial option for you.

The experienced attorneys at Gold, Lange, Majoros & Smalarz, P.C. are here to help you get the fresh start you deserve.