Last Sunday, July 20, 2014, Liz Weston of the L.A. Times gave an interesting answer to a question posed by a reader of the newspaper’s Money Talk feature. Today’s post adds to Liz’s advice.
The reader had accumulated $28,000 in credit card debt over the previous eight years, and had considerable law school debt and a home mortgage. He wanted to know whether a home equity loan was a smart choice to solve his problems.
Liz gave a good answer, but the LA Times’ space constraints made it impossible for her to cover things in detail. Her response included the statement: “Bankruptcy probably isn’t in the cards for you, of course, given your resources.” This led me to today’s post.
But first, a caveat: In order to give the reader an accurate analysis of the application of bankruptcy to his problems, I would need a lot more information. Thus, what I am about to say focuses on general principles, and is not a substitute for a thorough evaluation of the case using detailed documentation.
I. Chapter 7 Bankruptcy
I suspect that Liz had Chapter 7 bankruptcy in mind when she made her comment.
In a Chapter 7 bankruptcy, the debtor’s dischargeable debts are discharged without the creditors getting anything. Since this is such a big hit on the creditors, there are some limitations. One such limitation is on what the debtor gets to keep. The debtor keeps exempt assets, but the Chapter 7 Trustee assigned to the case seizes and liquidates the nonexempt assets for the benefit of the creditors.
Given that the reader has enough equity that he was considering a home equity line of credit (“HELOC”), it may be that he has too much equity to fully exempt. If that is the case, then a Chapter 7 bankruptcy might be a poor choice since he and his wife would lose their home to the depredations of the Chapter 7 Trustee assigned to the case. Again, more detailed information about his assets and encumbrances against them are needed to say for sure.
However, two other chapters of the Bankruptcy Code may be worth considering because debtors filing bankruptcies under those chapters can keep their assets regardless of their value or exempt status.