In the last few years, bankruptcy laws have become stricter. In some cases, a judge will eliminate HELOC debt. However, it has been standard practice to keep debts in place in cases of fraud. If a borrower lies on a loan application (which happens regularly with stated income loans), a judge will generally not discharge the debt.

Earlier this year, a judge made an interesting ruling. After determining that a couple had lied on their stated income HELOC application by inflating their salaries, the judge discharged the debt on the basis that stated income applications are not a reliable source of facts.

Calculated Risk reports:

“In short, while the Court found that the Hills knowingly made false representations to the lender, the lender’s claim that it “reasonably relied” on these representations doesn’t hold water, because “stated income guidelines” are not reasonable things to rely on. In essence, the Court found, such lending guidelines boil down to what the regulators call “collateral dependent” loans, where the lender is relying on nothing, at the end of the day, except the value of the collateral, not the borrower’s ability or willingness to repay. If you make a “liar loan,” the Judge is saying here, then you cannot claim you were harmed by relying on lies. And if you rely on an inflated appraisal, that’s your lookout, not the borrower’s.“

This is certainly an interesting decision and one that may have many subprime HELOC lenders worried.

See Also:

HELOC Foreclosure

Tags | Heloc, heloc crisis, HELOC foreclosure, heloc laws, home equity line of credit