Second related question - If I file for Chapter 7, will the credit limit on my home equity line of credit be decreased as I make payments?
Third related question - I also have an unsecured personal line of credit that I use for overdraft protection (not a credit card but a line of credit). If I file for Chapter 7, can the bank close this line of credit?
And, in response to the three questions, even if the banks could take such actions, is it likely to happen to in response to my bankruptcy filing?
The interest rate on your home equity line will not increase, it is governed by the contract between you and the lender.
The credit limit will not be decreased; in fact you may be eligible to remove or limit the amount of the secured portion of the lien if your home value is below the amount due on the first mortgage or home equity loan.
Discuss your rights regarding Bankruptcy with a Maryland Bankruptcy attorney in response to your other questions.
The answer to your first question is governed by the terms and conditions of the note that you signed. It is unlikely that a bankruptcy filing alone will result in an increase in your home equity loan interest rate. However, there are other "triggers" that in some ways relate to your intention of filing for bankruptcy that may act to do so. These may include stopping payments on credit cards and the deterioration of your credit score. Once you stop making payments on your accounts, you should expect creditors to act defensively to protect their interests. Creditors may reduce credit limits, increase interest rates, etc. Once you have made a decision to file for bankrutpcy, it is best to use cash and debit cards (not credit, overdraft protection, etc.) to cover your expenses before and during the pendency of your bankruptcy case. Lenders will be willing to extend you credit again after the completion of your case and sooner than you may think.
1. No. The interest rate is governed by the contract. Bankruptcy will not change that.
2. The credit limit can be reduced or the equity line can be closed to new money. Most likely, it will be closed to new borrowing and you will pay per the terms of the agreement if you choose to keep the house.
3. The unsecured line will be closed and discharged.
What a bank can do and will do are worlds apart. Most likely, the accounts will be closed. The lien from the equity line will remain and must be paid per the terms of the agreement if you want to keep the house.
[I am a Virginia-licensed attorney. This communication is intended as general information and not specific legal advice, and this communication does not create an attorney-client relationship.]
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When you file a bankruptcy, all lines of credit will be closed to you. You may be eligible to reopen these lines of credit after the bankruptcy is over, but don't count on it!
In most instances, variable interest rate loans depend on the market conditions, not on your credit score or whether you file bankruptcy. Still, it would be a good idea to look at the contract to see what criteria is used. Knowledge is power!
With a HELOC, if it is a 2nd, you might be eligible for a program called lienstripping through Chapter 13. I have a website explaining this program at the link below.
Hope this info helps & good luck!