As a California bankruptcy attorney, I often see homeowners tempted to tap into their home equity to pay off high-interest credit cards, medical bills, or personal loans. On paper, it can look appealing: lower interest rates, one monthly payment, and the satisfaction of wiping out balances. But in reality, it can be one of the most dangerous financial moves you can make — especially in California.
Your Home Equity May Already Be Protected
California’s homestead exemption now protects a significant amount of home equity — often hundreds of thousands of dollars — from creditors in bankruptcy. This means that if you file bankruptcy, most or all of your home equity may be safe. By using a home equity loan or cash-out refinance to pay off unsecured debt, you’re taking protected equity and using it to turn unsecured debt into secured debt.
That secured debt is tied to your home, meaning missed payments could lead to foreclosure. Don’t think that can’t happen to you. I represented hundreds of clients with great credit, secure jobs, second homes, and when the 2008 Great Recession happened, many lost their homes. We’re facing another recession. So, it’s critical that you protect yourself, your family, your home equity, and your retirement funds.
From Unsecured Debt to Foreclosure Risk
Credit cards, medical bills, and personal loans are unsecured debts. Creditors can sue you, but they can’t take your house without going through a long legal process. Once you convert that debt into a home equity loan, you put your house at risk. Even if you’re current on your first mortgage, defaulting on the new loan could cost you your home.
Your home provides a financial safety net. In retirement, during medical emergencies, or in unexpected life changes, protected equity can give you stability. Using it to pay off unsecured debt weakens your financial position and can create long-term risk.
Lower Rates Aren’t the Whole Story
Home equity loans can carry expensive closing costs, variable interest rates, and long repayment terms. Over 15–30 years, you may pay more than you ever would have on the original debt. Most people take these loans and do not change their spending habits. That means even though they had the best of intentions to not use the paid off credit cards, old habits die hard, and they start using them again, and slowly the debt creeps back up, only this time, there’s no more home equity to bail them out.
Had they protected that home equity and simply eliminated the debt and started working towards building an emergency savings, they would be far better off financially.
After 25 years as a Bankruptcy & Tax Attorney, Here Are 3 Things I Would Do!
- Get informed – You cannot make smart decisions based on old habits, anecdotal stories from well-meaning friends and family. You must get informed so you understand what is truly at risk and what your options are. We offer a FREE consultation, so you can make an informed decision about what is best for you.
- Protect your home equity, protect your retirement, and protect your future. For most, we can protect your home and retirement in bankruptcy. Those are generally your biggest assets, so why put them at risk to pay old credit card balances that were likely used to eat out, get gas, orders on Amazon, for Netflix, etc. You would never borrow a home equity loan so you could pay Doordash or Hulu, right? So, don’t do it now.
- I would never put my credit score over my financial well-being. Your credit score is not a badge of honor. It’s just a number that fluctuates. Most people are back up to a 680 credit score within 12 months of their bankruptcy discharge and a 700 within 18 months. You can qualify to buy a home with a 680 credit score. Plus, why are you so worried about getting more credit that quickly after bankruptcy? The goal is to remain debt-free and reestablish your good credit score.
Before you put your home on the line to pay off debt, talk to an experienced California State Bar Certified Bankruptcy Specialist Attorney. I can help you explore options that protect your equity and your future. Contact me today for a consultation. If you don’t need me, that’s exactly what I will tell you. My number one goal is to inform you of your options.
Author: Jenny L. Doling, Esq., LLM Taxation
CA State Bar Certified Bankruptcy Specialist
NACBA – Vice President
San Diego Bankruptcy Forum – Immediate Past President
Serving Bankruptcy Clients throughout California and
Serving Tax Clients Nationally