A Home Equity Line of Credit is a Mortgage

When the same thing keeps happening over and over again, I feel I should say something. Yesterday I met with a well-dressed, obviously educated and intelligent man. We talked about filing bankruptcy. He brought in and deposited on my desk a stack of documents that I usually request for such meetings. As I looked them over I said something that referred to him as having two mortgages. He seemed surprised and stated that he had only one mortgage.

At this point I had to take a breath and explain that a home equity line of credit is a mortgage, usually a second mortgage – but a mortgage. When you use a line of credit like that, it is like withdrawing money from a bank account – only it’s not money in a bank account, it’s the equity in your home. It always disturbs me to see people doing this because:

  1. Most don’t seem to realize that a home equity line of credit creates a lien on their home and therefore eats away at their home equity.
  2. Under Minnesota law the equity in our homes is one of the few things that most creditors cannot take away, except of course for a creditor holding a mortgage.
  3. Unlike a credit card debt or a medical bill, amounts owing on home equity lines must be paid, even in the event of a bankruptcy filing, unless the debtor is willing to let the home be foreclosed upon.

It seems to me that the loan officers do their best to make sure that consumers don’t understand the true nature of these credit lines. Not only don’t they explain it, but they can be downright deceptive about it. They talk as if it is free money, and encourage that kind of unhealthy thinking. Then they give the consumer an incomprehensible stack of papers that nobody understands, and say “sign here.”

I strongly suggest that if you need to go into debt for any reason, be sure you are doing it in a way that does not diminish the equity in your home. Beware of paperwork that puts a mortgage on your home in exchange for a favorable interest rate. That deal is not as good as it looks.

Valuing Assets – and Automobiles – in Bankruptcy

There seems to be a lot of confusion these days about how to put a value on the assets when we list them on a bankruptcy petition. Under the old law it was easier. The value was what you could get for an item if you put it out in the front yard and had to sell it within 24 hours – or at least that was my interpretation of what the law said.

Under the new bankruptcy law the value is what it would cost to replace an item with exactly the same thing, with the same wear and tear and in exactly the same condition. That’s pretty theoretical, since it seems to require that you establish a value by finding the price of an exact duplicate of what you have. When we don’t know what to say for a value, I tell my clients to start looking at Craig’s List or Ebay and see if they can find what they have and at least establish a price range.

One of the most contested areas is the value of cars. It seems that the bankruptcy trustees want to use NADA values, which tend to be aimed at what a dealer should be able to get for a car. If a trustee does use Kelly Blue Book, it’s usually the dealership value. There is nothing in the law, however, that says you have to buy a car from a dealer or use dealership prices. Recently, in the Ramirez case (359 B.R. 794), a bankruptcy judge in Colorado decided that the proper standard for valuing an automobile is the Kelly Blue Book private party value, a number which is always a lot lower than the price that a dealer could get for the same vehicle. I applaud that decision. It seems right to me.

As far as I know, no bankruptcy judge in Minnesota has issued a written decision on the issue. I recently received an email from another attorney, however, stating that two of our judges have stated verbally from the bench that Kelly Blue Book private party value is the one to use.

Read my Answers to Questions at Law Guru

For about a decade now I have been answering legal questions which I receive from LawGuru.com. I just posted a link to those answers at the right here on the blog. Over the years I have answered hundreds of questions on a great variety of topics. You can view the questions at http://www.lawguru.com/cgi/bbs/mesg.cgi?a=kellydav. From there I’m sure you can find a link for posting your own question should you choose to do so.

I usually put a little disclaimer at the end of each answer. A lot of the questions leave out essential information which if I only knew would change my response substantially. I am quite fond of saying that there is no substitute for a face to face meeting with a competent lawyer.