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Should you dip into your home equity for unsecured debt?

On Behalf of | Jun 13, 2019 | Chapter 7 Bankruptcy

Life has a way of getting ahead of us. Maybe you got into a car accident and couldn’t work for several weeks. Perhaps an unexpected bill, like a busted furnace, threw a wrench in your budget. Regardless of how it happened, when you fall behind with your bills, it can become impossible for you to recover financially.

When you have trouble making ends meet, you are more likely to spend money on credit that you don’t necessarily have. Your credit card bills can quickly start to exceed your monthly ability to pay. If your financial problems relate to an illness or injury, you may also have medical bills to worry about.

If you think that bankruptcy may be your only option, you may feel desperate to pay off what debt you can. However, before you take out a home equity line of credit to address your credit card or medical debt, you should talk with an attorney about whether that is the best approach.

A certain amount of your equity has state protection

In most states, individuals who file for bankruptcy protections can choose to either use the federal standard exemption or the state exemption. North Carolina does not recognize federal exemption. That means you must use the state exemption system.

For most adults in North Carolina filing as an individual for bankruptcy, the courts will allow the exemption of up to $35,000 in equity. If you are 65 years of age or older or your spouse has died and you hold the property in a certain form of title, you may be able to exempt up to $60,000 worth of equity. That means that even if you qualify for Chapter 7 bankruptcy, the courts cannot liquidate up to that amount of equity in your home.

It may make sense for an individual to avoid bankruptcy by cashing out some of their equity if they know that the courts will force them to liquidate some of those assets. However, if you are filing for Chapter 13 bankruptcy or if you don’t have more equity than the state limit, using that equity to repay debts eligible for discharge of bankruptcy could be a financial mistake.

Good advice is invaluable when you have financial issues

Many people inadvertently dig themselves a deeper hole when attempting to deal with financial hardship. If you don’t understand how bankruptcy and other debt relief systems work, you could make mistakes that cost you and your family thousands of dollars or more.

An attorney who is familiar with bankruptcy can guide you through the filing process or help you take intelligent steps to avoid bankruptcy and protect your status as a homeowner. Before you make any major decisions related to bankruptcy or staggering levels of debt, sit down with a North Carolina family law attorney to find out what options you really have.


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