Boston Bankruptcy Lawyer

Equity

Equity is a variation on “debt consolidation” that is based on ownership of real estate. If a home is worth more than the purchase price, the owner has equity. A number of banks will lend money against the value of the home, assuming that the borrower’s credit report looks good. There is little risk to the lender, since they can foreclose on the property to recover their money.

If a debtor has equity in his home, he may be able to get a loan using that equity as collateral. This is known a “second mortgage” or “equity line of credit.” This loan may allow the borrower to pay of medical bills, credit cards, or other pressing debts. Once the debt is paid off, things can go very well, or they can go very poorly. If the borrower is a disciplined person financially with a temporary hardship situation, he or she may emerge from the second mortgage with credit intact. This person still has the same level of overall debt, but structured in a way that the debtor can live with. This is the good situation.

The Risk of Secured Debt

The bad situation occurs when the debtor finds him or herself in worse shape using the equity in their home. Borrowing against a home is a problem in that it trades an unsecured debt, such as credit card debt, for a secured debt – the second mortgage. While unsecured debts can often be canceled or substantially reduced through filing bankruptcy, secured debts are tied to their collateral. This means that if the borrower doesn’t pay the second mortgage, the bank can force the sale of the collateral used for the loan. If a loan on a debt secured by a house is defaulted on, the debtor may lose his home entirely.

Contact a Boston Bankruptcy Lawyer

If you are facing unmanageable monthly payments and are weighing your options, seeking the advice of an experienced professional can keep you from making critical errors and digging yourself into a deeper hole. Contact the Boston bankruptcy lawyers of Joshua Spirn & Associates at 1-800-975-5346 for more information.