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Dear Liz: My wife and I maintain a largely untapped home equity line of credit as a source of emergency funds in the event of a job loss, medical needs, etc. With so many financial institutions seemingly on the verge of bankruptcy, what happens to our ability to draw on our line of credit should the bank go under?

Answer: Your line of credit is one of the bank’s assets. If your bank fails, the bank that takes over would add your loan to its books.

That said, the new bank may have different standards for how much of your equity you can borrow and may cut back or freeze your line of credit. That could happen even if your bank doesn’t fail, since many lenders are reducing their risk exposure by cutting back on lines of credit, particularly in areas where home prices are falling rapidly.

You’re probably safe, for now, if the balance you owe on your mortgage plus your home equity credit limit total less than 60% of your home’s current value. If your “loan-to-value” exceeds that limit, however, you would be smart to look for alternative sources of emergency funds. The best: cash in the bank.

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