Failed business loan strains couples’ finances

Dear Liz: We took a home equity loan against our house to open a business in 2006. We also ran up credit card debt for the business. The business went under, and we’re struggling to pay off the loan, which is $150,000 (a $1,150 payment every month), and the credit card debt, which we got down to about $20,000 from $37,000. Is there any way to get relief from the loan since it was a legitimate business (a franchise we bought from another franchisee)? We don’t know what to do and have been taking money out of our savings to pay the debt.

Answer: Your home equity lender doesn’t care whether you spent the money on a “legitimate business” or an around-the-world cruise. The lender expects to get paid, and chances are it will, since you secured the loan with your house. Failing to pay a home equity loan can trigger a foreclosure.

If you have equity in your home, you may be able to do a cash-out refinance of your current mortgage to pay off the loan. You’d wind up with a bigger primary mortgage, but a longer payback period and a lower interest rate should reduce your total debt payments. Another option is to sell your home to pay off the debt so you can start over.

What you shouldn’t do is dip into your savings without a real strategy for resolving this debt. A session with a fee-only financial planner could help you understand your options. The planner also may suggest a consultation with a bankruptcy attorney.

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