THERE IS ONLY A HELOC ON THE HOUSE WHICH IS HIGHER THAN THE HOUSE IS CURRENTLY WORTH BY $130.
You may eliminate the debt if you surrender the house. If you desire to keep the house, you keep the HELOC. You might use the bankruptcy to try to work out a modification of the loan terms, but it sounds as though the interest rate might be the only term worth looking at. If the house is only $130.00 underwater, you do not have much to complain about compared with the average homeowner I meet with.
I think what you are referring to is what we call a "lien strip". In a Chapter 13 bankruptcy case, any liens on real property which are "wholly unsecured" can be stripped off the property and converted to unsecured debt, which then gets discharged through the bankruptcy. The effect of this is that after the bankruptcy is completed, you still own the property and the "wholly unsecured lien" no longer encumbers the property. However, for a lien to be wholly unsecured, there cannot be any equity to cover any of the amount owed. If you only have one lien on the property, it cannot be wholly unsecured, because the house has some value, which supports some portion of the debt. There are other strategies that could potentially benefit you in the situation you describe, but without knowing the details of your case, I cannot tell you exactly how you could benefit from a bankruptcy.
I can say that if you anticipate filing a chapter 13 bankruptcy, I strongly recommend hiring an attorney. I have seen some people successfully complete a chapter 7 on their own, but chapter 13 cases are very complex, and most people who file without an attorney get dismissed without a discharge of their debts.
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Lien stripping in Chapter 13 is only available for subordinate mortgages that are wholly unsecured (because the 1st mortgage is larger than the value of the property).
If the property has any value to it, the lien cannot be removed through Chapter 13. If the property was only worth $1, you would not qualify to remove the lien in any form of bankruptcy.
If you intend to forfeit the property, of course, you will not be financially responsible to continue paying the mortgage after filing bankruptcy as the debt will be discharge.
Hope this perspective helps!
All I want to add to the excellent answers my colleagues have given you is that a HELOC is no different legally than any other mortgage loan. It is a debt secured by a lien on your house. Unless some exception to the so-called "anti-modification" clause in Code section 1322(b)(2) applies, the bankruptcy judge is powerless (partly because your own congressional delegation opposed legislation that would have changed the law) to alter it. Nonetheless, you should consult with a bankrutpcy lawyer who also has expertise in Truth-In-Lending (TILA) issues, because the TILA disclosures you were given may well have been inappropriate to the closed-end credit you may actually have received.
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