Bankruptcy Law

Lenders Freeze Home Equity Lines, Avoiding Possible Chapter 13 Cuts

Instead of providing the expected financial cushion in tough economic times, home equity lines are disappearing just when some owners—including attorneys—were relying on being able to use them.

Jerry Tao, a part-time lawyer in Las Vegas, is in better shape than most—he made more than $500,000 last year, and never accessed his $50,000 Countrywide line. However, he’d planned to do so, to make some home improvements and replace his 1995 SUV, reports Bloomberg. Now, that plan is a no-go, since Countrywide cut off his access to his line despite a credit score, Tao says, that falls between 750 and 770.

Countrywide has suspended the home equity lines of virtually every customer it had in Las Vegas, the news agency says, and, along with three other lenders, is responsible for freezing some 600,000 home equity lines nationwide since January. The problem is, with home values falling because of the national mortgage meltdown, lenders are worried about borrowers drawing on additional credit, particularly in areas such as Las Vegas and Los Angeles where housing price declines have been particularly pronounced.

There may be good reason for that concern, as some borrowers struggle to pay basic bills, according to the Enquirer: For borrowers who go into Chapter 13 bankruptcy, an equity line can be treated as unsecured debt and partially written off, if the amount owed exceeds the home’s value. By contrast, bankruptcy judges don’t have the power to alter the terms of a mortgage that exceeds the value of the borrower’s home, although the U.S. Senate is talking about giving them authority to do so.

In the meantime, for those who are still ahead of the game, the best solution to the problem is a traditional one, Jack Williams, Georgia State University law professor tells the Cincinnati newspaper. “Americans spend too much and don’t save enough,” he says. “Once an economic downturn takes hold, those mistakes get magnified.”

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