Arizona’s heat can be unbearable in the summer, and it’s difficult to spend more than a few minutes outside unless it’s in a swimming pool. If you don’t already have one and you have the space in your backyard, you may be thinking of installing one, or maybe you installed a pool in your home recently. Unless you pay for pool installation up front with cash, there are loan options to finance this type of home upgrade. But what happens if your debt gets out of control and you are eventually forced to declare bankruptcy? Can the debt be cleared, or can the pool be removed from your yard? Read on for more information about pool loans in bankruptcy in Arizona. For your free phone consultation with an experienced member of our Arizona bankruptcy team, call 602-649-4949.
Assessing the Situation
If you are considering bankruptcy and have an outstanding pool loan, this is probably one of your most significant liabilities. The most important factor when determining if a pool loan is dischargeable in bankruptcy is whether the loan is secured or unsecured. These two types of debt are treated very differently in bankruptcy. Then, you will need to determine which chapters of bankruptcy are available to you, which is largely based on income.
For those who don’t have the cash to pay for the installation of a pool in their homes, there are a few different financing options. Your pool manufacturer may offer their own loans, or some homeowners use home equity loans or HELOC financing to pay for the expense. Others may use a cash-out refinance or a personal loan to pay for a swimming pool. It will be highly important to determine if the pool loan is secured or unsecured.
Home Equity Loan
A home equity loan is a second home mortgage that provides the homeowner with a large sum of cash- here, to be used to pay for the pool. This might be the best interest rate available to the homeowner, and they could have excess home equity due to the volatile post-pandemic housing market. But if the homeowner falls behind on payments for their pool, their entire home becomes at risk of foreclosure. Because this is a secured debt, it would not be dischargeable in chapter 7 bankruptcy. Chapter 7 could only clear other debts to make room in the homeowner’s budget for loan payments. But chapter 13 gives the homeowner a 3- or 5-year payment plan to pay off the pool loan while under court protection from creditors. If the homeowner meets requirements like owing more on the home than its market value, the secondary mortgage can even be cleared in chapter 13 bankruptcy.
HELOC Financing
HELOC financing is similar to a home equity loan because the funds both come from the equity in the home. However, HELOC stands for Home Equity Line of Credit, so it is a revolving credit line which can be borrowed from more than once- they typically come with a time limit of 10 years. The primary residence is also secured to the debt for HELOC financing, putting the homeowner at the same risk of foreclosure if they miss payments. This means that it receives a similar treatment in bankruptcy. Chapter 7 can only clear other debts to pave the way to afford HELOC financing payments, while chapter 13 gives the homeowner a chance to pay off the debt in a court-monitored payment plan.
Cash-Out Refinance
A homeowner can replace their current mortgage with a new, higher one and receive the cash difference to pay for expenses like a swimming pool installation. Because this is a home mortgage, the home is secured as collateral for this type of loan, giving it the same treatment in bankruptcy as the types of debt described above. However, it doesn’t create a second mortgage, so there is no opportunity to clear it in chapter 13 bankruptcy. A homeowner who used a cash-out refinance to pay for their swimming pool should discuss their situation in depth with a bankruptcy attorney to determine which chapter would be more advantageous.
Personal Loan
Some homeowners avoid paying for swimming pool installation with personal loans because they often carry higher interest rates than home equity-based financing. But these homeowners often have the most straightforward path to clearing the debt should they ever file for bankruptcy. Personal loans are unsecured, so the creditor can take the asset back if possible, but there is no other collateral at risk of seizure if the homeowner files for bankruptcy. This could only be an issue if a homeowner has an above-ground pool and files for chapter 7 bankruptcy.
Personal loans can be wiped out in chapter 7 bankruptcy, as long as the homeowner qualifies. To show income qualification, the debtor must show their household income falls below the state median, or that they don’t have enough income to pay their debts with the means test. In chapter 13 bankruptcy, personal loans are grouped in the last category of debt paid in the payment plan. If the debtor pays off all of their bankruptcy costs, secured debts, and priority debts, they only need to pay off as much unsecured debt as they can afford with the time remaining in their payment plan.
Installing a Swimming Pool and the Homestead Exemption
When a debtor files for bankruptcy, they should apply exemptions to protect all of their assets. Failure to do so can result in the asset being taken by the bankruptcy trustee, or the debtor being forced to contribute the asset’s value to their chapter 13 payment plan. If the swimming pool is in-ground, it becomes part of the primary residence and will need to be protected with the homestead exemption in bankruptcy. If it is an above-ground pool, it is not considered part of the home and will need to be protected with some other exemption. Keep in mind that Arizona does not allow for the use of federal exemptions, nor does it offer a wildcard exemption to be used on an asset of the debtor’s choice.
The installation of an in-ground swimming pool can significantly increase a home’s value. A homeowner should be aware of how the installation of a pool will change their home’s equity, because that is the most important figure for a bankruptcy exemption. Arizona’s homestead exemption is currently worth $400,000. If the debtor has more equity than that in their home, they will need to find a strategy to protect their home if they wish to file for chapter 7 bankruptcy.
Drowning in Debt? Consider Bankruptcy Today.
Installing a swimming pool in your yard can be a great investment, and even feel like an absolute necessity in the Arizona heat. But if you ever fall behind on payments for your pool, you may have limited debt relief options available to you. Our Arizona bankruptcy team can help you figure out if chapter 7 or chapter 13 are among them. Get your bankruptcy questions answered and see if you qualify for our Zero Down payment plan option. Schedule your free consultation with Atlas Bankruptcy Lawyers today at 602-649-4949 for more information.
