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Ask The Experts: Giving Up Home, But What Happens to My Line of Credit?

Wednesday, 18 Feb 2009 | 1:46 PM ET

Carmen: First of all, love your show!!!! I used to go to bed at 10, now I can't wait for 10 to get here. Anyway, I bought a place in 2005 to fix up and sell. As we all know, things are slow to move and I have run out of money to pay my monthly payments. Now here is the problem: I took out a line of credit to fix it up and I used the house as collateral. Now I am going to turn the house over to the mortgage company, but what will happen to the line of credit?

I have an IRA with a little money in it and I don't want to let that get away. As far as other money, I have a little savings that I am living on to pay bills, but it is not much. Now I live with my wife in her home, and my name is not on anything that she owns including the house. I am self-employed and work out of her home. The only thing that I have is my work truck that is almost paid for. Now I don't want them to take it, or I will be out of work altogether! If you could give some advice, it would help me out a great deal on what I need to look for when they come calling. Once again, love your show!!! --Gordon O.

Gordon--That line of credit will most likely be absorbed by your home. Even in bankruptcy, according to new rules, lenders cannot go after your 401(k) or IRAs to pay back debts. The trick here is to understand (and I don't see those numbers here) how much equity you have in that home, if any. If you have equity, that money (or value) will go toward what you owe on the home, which you used as collateral, and you may not see any of it. If you have no equity, the balance of what you owe on the mortgage will be forgiven (per the Mortgage Forgiveness Debt Relief Act).

However, what you may or may not owe on that line of credit will be stated in your paperwork with your lender. Scour the fine print and see what, if anything, you agreed to in terms of defaulting on that loan. If you still have more questions about your full debt-picture, contact a non-profit credit counselor near you at NFCC.org.

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Carmen Wong Ulrich is the host of On The Money