Question: My mom owns her home (no mortgage) but has a line of credit owing with the house as collateral. If she was to declare bankruptcy would she need to sell the house to pay off the line of credit owing or would it be considered a debt and be written off with the bankruptcy? Any help would be appreciated. She is located in Ontario.
Secured Debt and Bankruptcy
Since the line of credit is secured by the house as collateral, it is exactly the same as a mortgage (which is simply a loan secured by a house). The only difference between a mortgage and a secured line of credit is that the mortgage has fixed terms of repayment (you pay the same amount each month), whereas you can make extra payments on the line of credit whenever you want.
To determine what will happen with her house if she goes bankrupt, the trustee will need to know the value of the house, and the amount owing on the line of credit. If there is significant equity, she will either need to pay that equity to the trustee, or sell the house. Either way, the secured line of credit will end up being paid and therefore it is not written off in the bankruptcy.
A better option for you mother if her house is worth more than the amount of her debt, would be to arrange payment terms with her lender. If there is significant equity in the house it is unlikely that the creditors will accept a reduction in the total amount paid. If she has other debts that need to be considered, she may want to look at other Debt Relief Options to deal with her other debts so she will have enough resources to pay back her line of credit.
This is a confusing area, so we suggest you consult a professional, debt relief expert for further information.