Rolling Credit Card Debt into a Home Equity Loan

            Every time I hear a banker speak at a function about the low rates on home equity loans I can't help but cringe a little.  I know that rolling credit card debt into a home equity line of credit or second mortgage may sound like the answer to getting out of debt.  It is true that you can find very low rates right now on home equity lines.  These rates are almost certainly lower than your credit card interest rates.  The banker will also almost certainly mention that if you roll your credit card onto you home loan then the interest can likely be deducted on your taxes.

           I am not saying that rolling your credit card debt on to a home equity loan is always the wrong thing to do....I am just saying that it is something that needs to be carefully considered.  Not unlike any decision in life, there are pros as well as cons to rolling your credit cards into a home equity line.  In my opinion, the biggest con is that you have just handed over your home as collateral to the bank.   If you get behind on credit card payments, the credit card company will typically sue you and may try to freeze your bank account or garnish a portion of your wages.  On the other hand, if you get behind on your home equity line, the bank is going to foreclose to take your home.  The bank isn't going to care that you have children, lost your job, that your dog died......the bank is going to foreclose on your house and if you aren't able to make the payment you will need to find a new place to live.

          Another factor that is extremely important to consider is how did you get into credit card debt in the first place?  You need to be brutally honest with yourself on this one.  Don't tell yourself that the credit card debt was due to job loss if you could pay all of your bills with your spouse's income and your credit card debt was the result of your family continuing the same lifestyle with recreational activities and entertainment on half of the income.  Don't tell yourself the credit card debt was due to emergency if the debt was incurred for car repairs, a medical expense of $3,000.00 or less or you have ever gone out to eat and paid with a credit card.  What I am saying is that it should not be an emergency when you need a car repair or have a medical bill.  Unfortunately, these expenses are going to happen.  You need to be prepared by not spending every penny you make and contributing to an emergency fund.

          Finally, if you do find yourself in a financial crisis and need to file bankruptcy, it is easier to get out from under credit card debt than a home equity loan.  It is rare that individuals are required to pay back 100% of their credit card debt in bankruptcy.  On the other hand, if you would like to keep a house after bankruptcy it is typically mandatory that you continue to pay both your first and second mortgage (there are some circumstances in which you don't have to pay the second mortgage).  Therefore, if you are considering making your unsecured debt secured by your house you better believe that this will be a long-term fix to your financial problems and have a plan to move forward without incurring any more debt.

        No matter how much money you have saved nor financial planning you have done there are some situations from which it is very difficult to recover without the assistance of bankruptcy.  At Halcomb Singler I have met with many couples who wish they could turn back the clock and made the decision not to roll their credit cards on to their home, not to empty out (or take a loan from) their 401k, not to have financed that car over 72 months, etc.  However, we cannot change the past....we can only move forward into your financial future.  If you believe you may need the assistance of a bankruptcy attorney to move forward please feel free to call my office at 317-575-8222 for a free initial consultation at our Carmel, Indiana office.

Halcomb Singler, LLP, is a debt relief agency.  It helps people file for bankruptcy under the bankruptcy code.  No attorney-client relationship with the firm of Halcomb Singler, LLP, is created through this blog. Also, please note that Erika Singler is an attorney licensed in Indiana and does not seek to practice law in any jurisdiction in which they are not properly authorized to do so.  The information contained in this blog is general in nature and should not be relied upon for the circumstances of any individual(s) or businesses.