Today we would like to help explain the difference between a HELOC and a purchase money 2nd loan as it related to bankruptcy. A HELOC or Home Equity Line of Credit, is a line of credit, similar to a credit card, that was given to you through the equity you have (or had in the past) in your home. A HELOC (also known as a second mortgage or junior mortgage) is taken out from your home after you have purchased your home. A purchase money 2nd loan is a 2nd loan that was used to buy your home. It is not a line of credit that was taken out after you bought your home. Instead, you may have taken out a 2nd loan to buy your home because you were not able to get one loan that what high enough to purchase the home that you wanted. So, a supplemental 2nd loan was used to get the amount you needed to buy a home. A purchase money loan may not be collected after a foreclosure in the state of California because California is a non-recourse state if you used the money to purchase the home and the home was your primary residence.
After a foreclosure or a short sale, a HELOC can be collected on any deficiencies that were not taken care of by the sale of the home. After the sale of a home, if the loans are not satisfied, collections activities may continue on the HELOC. There are 2 things that you need to watch out for. #1) The collection of the deficiency balance on the HELOC loan #2) Taxable income on any forgiveness from the HELOC loan. If the bank offers you a settlement amount and forgives the rest of the loan, you will get taxed on any amount that is forgiven like normal income tax. So, if a bank offers you to pay $5,000 to forgive a loan of $20,000, you will get taxed $15,000 as taxable income in your tax filing next year.
So, what is the best way to eliminate the collections activity and the taxable income on forgiving a loan? Bankruptcy is the best solution. If you use bankruptcy as a tool to eliminate the 2nd mortgage or HELOC, you will not get taxed on the amount as income. Bankruptcy will simply eliminate the loan in a Chapter 7 filing as unsecured debt after a foreclosure or short sale.
To learn more about this, please feel free to call us at (855) 257-7671. Bankruptcy Law Pros is proud to serve clients in Riverside County, San Bernardino County, Orange County, and Los Angeles County.