1. The home equity loan will involve either rewriting your existing mortgage at a much higher interest rate or will involve a second mortgage at a very, very high interest rate.
2. A home equity loan is not eliminated in a bankruptcy. If you are unable to pay all of your debts and are forced to file a bankruptcy in the future, you will owe on either the higher interest rate mortgage or on both mortgages (if you received a second mortgage rather than a rewritten first mortgage). In either event, this debt is not eliminated. Of course, you can surrender your house and file bankruptcy...in that case, you will no longer be responsible personally for the home equity loan -but you have traded your home for consumer debt! Likewise, do not borrow from retirement accounts.
HOMES AND RETIREMENT ARE NECESSARY FOR SURVIVAL. Do not threaten these assets because you are afraid of a bankruptcy or bad credit. Consult an attorney first.
There are certain protective categories available in bankruptcy which are referred to as "exemptions." In Alaska, you can choose from state or federal exemptions (all of one system or all of the other system). Misinformation concerning exemptions is common in much of the bankruptcy literature (for instance, you may have read that Alaska is an "opt-out" state - that is wrong!). By the way, if you have not done this kind of reading, don't worry. But those of you who have, beware.
Under the state exemptions, you can protect the following as an individual filer: Home equity (costs from sale are not deducted)-$70,200; Vehicle equity (low blue book less amount owing)-$3,900; and most furniture and clothing (garage sale values). In addition, there are miscellaneous categories such as tools of the trade. Most retirement is protected.
Under the federal exemption system, you can protect less equity in a home, but you can often protect almost all other assets including snow machines, four wheelers, collections, etc., depending on the value of these assets.
DO NOT ASSUME THAT YOU WILL LOSE ANY ASSETS IN A BANKRUPTCY. ONLY A BANKRUPTCY ATTORNEY CAN GIVE YOU THE ADVICE YOU NEED TO DETERMINE WHAT IS PROTECTED.
The vast majority of bankruptcies filed in Alaska are "No Asset" cases. All assets can be protected.
