Dear Bankruptcy Adviser,
I am trying to avoid filing bankruptcy and need to know what would be the best place to borrow money on seven acres of land to pay off some debt and maybe get in better financial condition to be able to get my budget back on track. And I’d like to know if you think this is a good idea?
— Randy

Dear Randy,
You are acting wisely as you look at all options available in an effort to avoid bankruptcy. Bankruptcy is a legal option available to people when paying debts becomes unmanageable. If you can avoid it and pay your bills, your credit will be forever grateful.

Unfortunately, you are fighting an uphill battle trying to use vacant land as collateral for a loan. Lenders are still acting very cautiously with their money. The rules and guidelines to get access to cash are increasingly difficult these days.

The reason is that giving a loan on vacant land is very risky. Under the old lending guidelines, when a dead person could be approved for a loan, you might have had a chance. That is just not the case anymore. Lenders are actually looking at a person’s financial picture and asking for documents to prove income and the ability to pay on the loan.

Depending on the current value of the land and the amount you are willing to take, I would be shocked if a bank would lend money beyond 35 percent of the value of the land through a secured line of credit or a refinance with cash out. And your interest rate, including points, could be more than 15 percent.

That means if the land is worth $50,000. You could possibly get $17,500, with five points at 15 percent interest. Points are an upfront fee on a loan that is added to the balance you are borrowing. Each point equals 1 percent of the value of the loan. In this example, the points would add $875 to the cost of the loan.

You also may have difficulty filing bankruptcy. You are able to exempt, or protect, some assets when you file bankruptcy. However, depending on the state in which you live, you might not be able to protect all your assets. That would mean you could lose the land even though no one will give you a loan against it. The land would be taken, sold and distributed to your creditors.

So you have a couple of things to look at prior to making a final decision. See if you can find a loan against the property and determine whether bankruptcy is even an option.

You are fortunate to even have an asset that might be worth something. While that does complicate your situation, you will need to explore all options thoroughly before making a final decision. You might be able to get a loan or you might be able to file bankruptcy. Right now, you just need to explore and consult with as many sources as possible. Good luck.

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