Home Equity Loan Instead of Bankruptcy?

June 23, 2021

Home equity loans can be a powerful tool for getting out of high-interest credit card debt. Should you get a home equity loan instead of filing for bankruptcy? Be careful and do your research before getting a home equity loan. They are not always a better deal than filing for Chapter 7 bankruptcy of Chapter 13 bankruptcy.

Home Equity Loans Only “Kick the Can Down the Road”

Kick the Can - Home Equity Loan Instead of BankruptcyRemember, home equity loans only “kick the can down the road.”  You will still be required to pay all the debt that you refinance into a home equity loan. Even though interest rates may be lowered, you will still be paying the entirety of the debt. This may actually prolong the debt because home equity loans are usually based on a 20 to 30-year repayment schedule.

Bankruptcy Solves the Problem More Quickly

Even in Chapter 13, you will be able to repay your debt more quickly in a 3 to 5 year period. This is a much shorter period than what a home equity loan offers. In fact, Chapter 13 many times can serve more as a guaranteed “mini-refinance.” You can also take advantage of it regardless of your credit situation.

Home Equity Loans Still Could Be The Way to Go

Indiana (and many other states) have a limited homestead exemption. This means that some people may not be able to file under Chapter 7 safely if there is too much equity in their home. This group of people’s main options may end up being a Chapter 13 or acquiring a home equity loan.

If the required Chapter 13 payment is too high, then a home equity loan may be a better option. Although it would be nice to repay the required debt in 3-5 years, sometimes this is simply impossible with certain income situations. In such cases, it may be better to get a home equity loan.  Or alternatively, you may be able to refinance the house entirely instead of filing for bankruptcy.

For more information, make sure to check out our Chapter 7 and Chapter 13 Bankruptcy pages.

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