Why using Home Equity to pay off Credit Card is insane.

By: Daniel Gershburg, Esq.

Another client with credit problems came in to my New York office today with the scenario heard all too often by this Bankruptcy attorney: Tons of credit card debt. Can’t make the payments. Collectors calling and hounding her at home and at work. The solution? Take out approximately $50,000 in the form of a home equity loan. Pay off the cards. Start “Fresh”.

This scenario gets played out in my office at least once a week. Here is why this is a horrible idea and one that if you do consider…you should stop considering immediately.

#1-Your credit cards are unsecured debt. A home equity loan is secured. Using one to pay off the other literally means the tv, groceries, etc., that you purchased can be paid for with your house. You heard me. If you pay for a route canal with your credit card, the debt (route canal) is unsecured. If, however, you decide to pay your Amex card with proceeds from a home equity line of credit(secured-they’ll take your house if you don’t pay the loan back), you’ve just secured your debt. You could lose your house for your teeth…or socks…or…you get the point. Why can you lose your house? Because those credit card loans that arent backed up by anything have now been paid off by a loan that is backed by your house that you worked so hard to purchase in the first place.

#2-Bad Habits are Bad Habits. So you got yourself into some debt. All of us have at one point or another. But that debt is either a reflection on your spending habits or on the economic reality you face. What makes you think that you can pay your home equity loan on a timely basis when you’re falling behind on your credit card payments? The “start fresh” attitude sounds and feels nice, but in reality, it doesn’t work as often as you think. Could it work for you? Sure. But the question is do you want to bet the house on it?

The solution? There are several. Consolidation, debt settlement, Bankruptcy, etc. There are numerous ways to get out of the position you find yourself in. Some make much more sense than others (I’m not a fan of debt consolidation in 95% of cases and it’s not because I am a Bankruptcy attorney.) It will take time, but there always is a way out. It will be tough, and it will be challenging, but that’s part of the point.

Daniel Gershburg Esq., is a Bankruptcy & Real Estate attorney serving a diverse clients in Brooklyn, Queens, Manhattan, Staten Island, Long Island and Westchester. Mr. Gershburg has given lectures and presentations to both attorneys and the community at large surrounding Bankruptcy and financial advocacy in the New York City area.