Post-Bankruptcy Survival: Do Home Equity Loans Create More Problems?

July 28, 2011 by  Filed under: Bankruptcy 

Exiting bankruptcy and rebuilding your finances with a home purchase is often a smart move. But sometimes post-bankruptcy debtors who use home equity loans can run into financial issues so bad that they can lead to a second bankruptcy filing. Let’s take a look at some of the home refinance issues and how you can avoid them after bankruptcy:

Receiving Grossly Inaccurate Appraisals

Inaccurate home appraisals have led many homeowners to file bankruptcy because they end up refinancing their property based on values that far exceed the true worth of the home. While in theory mortgage lenders should be able to detect these inaccurate appraisals, the reality is that they often fail to do so. When a debtor takes out a home equity loan or refinances based on inaccurate home appraisals they can soon find themselves upside down their mortgage with no way out other than filing bankruptcy. Post-bankruptcy debtors should make sure that they are working with professional and honest appraisers and get a second opinion before they attempt to borrow based on the appraisal. Using dependable referrals is probably the best way to find a good appraiser.

Increasing Expenses Beyond What You Can Afford

While it can be tempting for post-bankruptcy debtors to cash-out equity in their home by refinancing or taking out a home equity loan, such actions can create more expenses than they homeowner can reasonably afford. Remember, once you take out a home equity loan or refinance after bankruptcy, you will need to pay more on your mortgage each month. If you run into troubles paying, you may not be able to file another bankruptcy if you only received your bankruptcy discharge a few years ago. Post-bankruptcy debtors need to make an honest assessment of their finances before taking out additional loans on their home. Can you pay afford to pay the increased mortgage payment in the long-term? Or, is this increase in expenses likely to push you into another bankruptcy filing? If you decide to go ahead and refinance your home because you want to start a business and use the cash-out for something else that’s productive, just make sure you can do so without creating more financial issues.

Using The Cash-Out You Receive Frivolously

One of the most common mistakes that post-bankruptcy debtors make when refinancing their home is taking out too much cash and using that cash frivolously. If you’re considering a cash-out on your home’s equity, only take out enough to cover the project for which your need it. For example, if you want to start a business, remodel your home or continue your education, find out exactly how much it will cost and only cash-out what’s necessary. The alternative is that some post-bankruptcy debtors find they have exhausted the equity in their home and can’t afford to repay the refinanced mortgage because of the reasons stated above.

Reed Allmand is constantly looking for ways to improve the financial situation of his Dallas Bankruptcy clients. You can visit to view more articles like this and find great tips on managing your financial situation.

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