[Getting a HELOC](/blog/heloc-after-chapter-7) with Pending Litigation

Pending litigation creates uncertainty for HELOC lenders who need confidence in their collateral position and your ability to repay. Whether you're the plaintiff or defendant, active lawsuits can complicate or completely block HELOC approval, depending on the nature of the litigation, potential financial exposure, and whether the lawsuit could result in liens against your property.

Understanding what lenders look for and how different types of litigation affect approval can help you navigate this complex situation.

Why Lenders Care About Pending Litigation

HELOC lenders review public records, including court filings, during the underwriting process. Litigation raises several concerns:

Potential Lien Risk

Many types of lawsuits can result in judgment liens against your property:

• Unpaid debts and contract disputes
• Personal injury claims
• Professional malpractice suits
• Property damage claims
• Divorce proceedings

If a plaintiff obtains a judgment while your HELOC is pending or active, they may record a lien that affects the lender's position and your available equity.

Financial Uncertainty

Litigation creates unknown financial exposure:

• Defense costs: Legal fees can run into tens or hundreds of thousands of dollars
• Potential judgments: Damages awarded against you affect your ability to repay the HELOC
• Settlement pressure: You might need substantial funds to settle, competing with HELOC payments

Debt-to-Income Impact

If you're making payments related to litigation (payment plans on judgments, legal fee arrangements), these affect your DTI and borrowing capacity.

Title Issues

Some litigation directly affects [property title](/blog/title-search-explained):

• Boundary disputes
• Easement conflicts
• Ownership challenges
• Construction defect claims against your property
• Mechanic's liens that become lawsuits

These can cloud title and make it impossible for title insurance companies to insure the HELOC lender's position.

Types of Litigation and Their Impact

Not all lawsuits create equal concern for HELOC lenders.

Litigation Where You're the Plaintiff

If you're suing someone else, lender concerns are typically minimal unless:

The lawsuit involves your property: Boundary disputes, construction defects, or property damage claims may cloud title until resolved.

The lawsuit is substantial: Multi-million dollar commercial litigation might suggest business financial distress.

You're likely to lose: If counterclaims against you could result in substantial judgments.

Impact: Low to moderate. Many lenders will proceed if the litigation doesn't directly affect the property or your financial stability.

Litigation Where You're the Defendant

Lawsuits against you raise more concerns:

Personal injury/tort claims: If someone is suing you for injuries or damages, potential judgments could become liens on your property.

Contract disputes: Unpaid debts, breach of contract, or business disputes that could result in money judgments.

Creditor lawsuits: Collection actions by credit card companies, medical providers, or other creditors signal financial distress.

Impact: Moderate to severe, depending on claim amount and likelihood of judgment.

Property-Related Litigation

Lawsuits directly involving your property are most problematic:

Boundary disputes: Neighboring property owners challenging your property lines

Construction defect claims: If you're being sued for construction problems or suing your builder

Mechanic's liens: Contractors suing for unpaid work (already a lien, lawsuit is to foreclose it)

HOA disputes: Association suing for unpaid dues or rule violations

Easement conflicts: Disputes over access rights or utility easements

Impact: Severe. These directly affect title and marketability, often making HELOC approval impossible until resolved.

Divorce Proceedings

Divorce is a special category of litigation:

Uncontested, simple divorce: Minimal impact if property division is agreed and documented

Contested divorce with property disputes: Severe impact. Lenders won't approve HELOCs when property ownership is being litigated

Divorce with temporary orders: Moderate impact. Some lenders will proceed if you have court orders clearly establishing your rights to the property and permission to encumber it

Impact: Low to severe depending on complexity and property involvement.

Bankruptcy Litigation

Active bankruptcy creates near-automatic HELOC denial:

Chapter 7: You cannot take on new debt without court approval; most lenders won't lend to active bankruptcy filers

Chapter 13: You must obtain court approval for new debt; finding willing lenders is difficult

Bankruptcy preference actions: If you're being sued by a bankruptcy trustee to claw back previous payments, this signals serious complications

Impact: Severe. See dedicated articles on bankruptcy and HELOCs.

Criminal Proceedings

Criminal cases rarely directly affect HELOC approval unless:

Fraud charges: Financial crimes suggest unreliability and risk

Property-related crimes: If criminal charges could result in forfeiture of the property

Pending restitution orders: Court-ordered payments that affect DTI

Impact: Low to moderate for most cases; severe for financial crimes or property forfeiture risks.

What HELOC Lenders Evaluate

When litigation is present, lenders conduct additional due diligence:

Court Record Review

Underwriters will:

• Pull all litigation involving you or the property from public records
• Review complaints to understand claims and potential exposure
• Check for judgments, liens, or lis pendens notices
• Verify current status (active, settled, dismissed)

Financial Exposure Assessment

Lenders evaluate:

• Claimed damages: How much is being sought in the lawsuit?
• Potential judgment amount: Realistic assessment of likely outcome
• Insurance coverage: Does insurance cover the claim, reducing your exposure?
• Legal fee exposure: Estimated costs to defend or pursue the claim

Title Impact

Title companies determine whether litigation affects insurability:

• Lis pendens: Notice of pending litigation affecting property (major red flag)
• Mechanic's liens: Already recorded liens being foreclosed
• Quiet title actions: Lawsuits to establish ownership
• Boundary disputes: Challenges to property boundaries

If title insurance can't be issued, HELOC approval is impossible.

Resolution Timeline

Lenders consider:

• Is settlement imminent?
• Is trial scheduled soon?
• Has the case been pending for years without resolution?
• Are you actively defending or has a default been entered?

Quick resolution possibilities may lead to delayed approval rather than outright denial.

Strategies to Get Approved with Pending Litigation

1. Resolve the Litigation Before Applying

The cleanest approach is settling, winning, or dismissing the lawsuit before applying for a HELOC:

Settlement: Negotiate resolution and obtain dismissal with prejudice

Summary judgment: Win the case through pretrial motions

Dismissal: Get the case dismissed voluntarily or involuntarily

Trial victory: Win at trial and ensure appeals period has passed

Once litigation is completely resolved and any liens are released, apply for your HELOC with a clean record.

2. Provide Complete [Documentation](/blog/heloc-documentation-requirements)

If you must apply with pending litigation:

Case details: Complaint, answer, recent pleadings showing case status

Attorney opinion: Letter from your attorney explaining the claims, defenses, and likely outcome

Insurance coverage: Documentation showing insurance covers the claim

Financial impact statement: Detailed analysis of maximum financial exposure

Settlement status: Evidence of ongoing settlement negotiations

Transparency and thoroughness can overcome lender concerns if exposure is limited.

3. Demonstrate Insurance Coverage

If you're being sued for something covered by insurance:

• Provide your insurance policy and coverage confirmation
• Show the insurance company is providing defense (retaining attorneys)
• Document policy limits and deductibles
• Obtain a letter from your insurance company confirming coverage

If insurance will pay any judgment, your financial exposure is limited to the deductible, significantly reducing lender concern.

4. Obtain Legal Opinions

A letter from your attorney addressing:

• The merits of claims against you (or your claims if you're the plaintiff)
• Likelihood of success
• Estimated timeline to resolution
• Maximum financial exposure
• Whether the case could affect property title

Attorneys' opinions carry weight with underwriters, especially from established firms.

5. Escrow for Potential Settlement

If settlement is likely and you know the approximate amount:

• Agree to escrow funds at HELOC closing to cover settlement
• Structure the HELOC to provide settlement funds
• Show lender that settlement will be funded from HELOC proceeds

This removes uncertainty and ensures resolution.

6. Wait for Resolution if Timeline Is Short

If trial or settlement is expected within 3-6 months:

• Wait for resolution rather than applying with pending litigation
• Once resolved, apply with clean title
• Avoid application fees and wasted time on likely denials

Patience often produces better terms and higher approval likelihood.

7. Choose Your Litigation Strategy Carefully

If you're considering filing a lawsuit:

Think about timing: Filing suit right before or during a [HELOC application](/blog/heloc-application-process-step-by-step) may complicate approval

Consider [alternatives](/blog/heloc-alternatives): Arbitration or mediation may resolve disputes without public litigation records

Avoid unnecessary suits: Weigh the benefits of litigation against potential impacts on credit access

8. Address Property-Specific Litigation Urgently

If litigation directly affects your property:

Boundary disputes: Get a survey, negotiate with neighbors, or resolve through quiet title action

Mechanic's liens: Pay legitimate liens or bond them off to release the property

Construction defects: Settle with builders or complete repairs to remove claims

HOA disputes: Pay dues or resolve rules violations to get lawsuits dismissed

These issues will absolutely block HELOC approval until resolved.

Lis Pendens: The HELOC Killer

A lis pendens (Latin for "pending lawsuit") is a notice filed in public records warning that litigation affecting the property is pending.

Why Lis Pendens Blocks HELOCs

Lis pendens serves as warning to potential buyers and lenders that:

• Property ownership may change based on lawsuit outcome
• Title may be defective
• Purchasing or lending against the property is risky

Title insurance companies typically refuse to insure properties with lis pendens, making HELOC approval impossible.

Types of Cases with Lis Pendens

• Foreclosure actions
• Divorce property disputes
• Quiet title actions
• Partition suits (co-owners forcing sale)
• Specific performance of purchase contracts
• Construction lien foreclosures

Removing Lis Pendens

To proceed with a HELOC:

Settle the underlying lawsuit and obtain dismissal with release of lis pendens

Bond off the lis pendens: Post a bond equal to the claimed amount, releasing the property

Challenge the lis pendens: File a motion to expunge if improperly filed

Win the lawsuit: Obtain judgment in your favor and release of lis pendens

Until the lis pendens is released, HELOC approval is virtually impossible.

Divorce and HELOCs

Divorce litigation requires special handling:

Both Spouses Must Consent

If you're married and the property is marital, most states require both spouses to consent to a HELOC, even if only one spouse is on title. During divorce:

• Get written consent from your spouse
• Obtain court approval if there's a temporary order
• Ensure divorce decree or settlement agreement permits the HELOC

Property Division Uncertainty

If property ownership is contested:

• Wait until property division is finalized
• Obtain court orders clearly awarding you the property
• Complete the divorce and property transfer before applying

Using HELOC Proceeds for Divorce Costs

Some lenders are uncomfortable with HELOCs funding divorce-related expenses:

• Legal fees for the divorce
• Buyouts of spouse's interest
• Settlement payments

Be honest about intended use but frame it neutrally (debt consolidation, cash reserves).

Disclosure Obligations

You must disclose pending litigation on HELOC applications. Questions typically ask:

• Are you a party to any lawsuit?
• Are there any liens, judgments, or legal claims against you?
• Is there any pending litigation affecting the property?

Consequences of Non-Disclosure

Failing to disclose litigation is fraud:

• Immediate application denial if discovered during underwriting
• HELOC acceleration and demand for full repayment if discovered after closing
• Potential criminal charges for loan fraud
• Lender lawsuits for damages

Always disclose litigation honestly.

Post-Approval Considerations

If you obtain a HELOC and then become involved in litigation:

Review Your HELOC Agreement

Most HELOC agreements include clauses addressing:

• Requirement to notify lender of lawsuits affecting the property
• Default triggers if judgments or liens are recorded
• Lender rights to freeze credit line if title issues arise

Notify Your Lender Promptly

If you're sued and it could affect the property:

• Notify your HELOC lender in writing
• Provide case details and legal representation information
• Keep lender updated on case progress
• Demonstrate you're actively defending

Proactive communication may prevent credit line freeze or default declaration.

Avoid Judgment Liens

If you lose a lawsuit:

• Appeal if grounds exist
• Settle before judgment if possible
• Negotiate payment plan to avoid lien recording
• Pay judgment immediately if affordable

Recorded judgment liens can trigger HELOC default provisions.

Alternative Financing with Pending Litigation

If HELOC approval is impossible:

Personal loans: Unsecured loans avoid property-specific issues, though with higher rates

Litigation funding: For plaintiffs, litigation finance companies fund lawsuits in exchange for percentage of recovery

Borrowing against other assets: Securities-based lending, whole life insurance loans, or retirement plan loans

Family loans: Private financing from family members until litigation resolves

Settlement funding: If you're a plaintiff awaiting settlement, specialized companies buy portions of expected settlement

Related Articles

• [Alabama HELOC Guide](/blog/alabama-heloc-guide)
• [Connecticut HELOC Guide](/blog/connecticut-heloc-guide)
• [Credit Repair Homeowners Complete Strategy](/blog/credit-repair-homeowners-complete-strategy)
• [Heloc After Bankruptcy](/blog/heloc-after-bankruptcy)
• Heloc After Chapter 13

Frequently Asked Questions

Do I have to disclose lawsuits on my HELOC application?

Yes. Applications ask about pending litigation, and you're legally obligated to disclose truthfully. Lenders will discover lawsuits through public records searches, so non-disclosure is both fraudulent and pointless.

What if I'm the plaintiff and likely to win or settle favorably?

This is much less concerning than being a defendant. If the lawsuit doesn't affect your property title and won't create financial hardship, many lenders will proceed. Provide documentation showing the case doesn't threaten your financial stability.

Can I get a HELOC while my divorce is pending?

It depends. If property division is agreed and you have court permission to encumber the property, possibly. If ownership is contested or your spouse objects, no. Most lenders prefer to wait until divorce is finalized.

Will a mechanic's lien on my property prevent HELOC approval?

Yes, almost certainly. Mechanic's liens are recorded against your property and take priority over subsequent liens like HELOCs. You must pay off or bond off the lien to proceed.

What if the lawsuit is frivolous and will be dismissed?

Provide your attorney's opinion to that effect, showing the claims lack merit and dismissal is likely. If the case doesn't affect property title and you can demonstrate it's baseless, some lenders will proceed, especially if dismissal is imminent.

How long after litigation ends should I wait to apply?

Once litigation is completely resolved (dismissed, settled, or judgment satisfied) and any liens are released, you can apply immediately. Wait 30-60 days to ensure public records are updated and title is clearly clean.

Can I use HELOC proceeds to settle a lawsuit?

Yes, if the lender approves the HELOC knowing this is your intended use. Some lenders will escrow settlement funds at closing to ensure the litigation is resolved, protecting their collateral.

What if I'm sued after my HELOC is approved but before closing?

Disclose this to your lender immediately. They may delay closing until the lawsuit is resolved or withdraw approval if the litigation threatens property title or your financial stability.

Will small claims court cases affect my HELOC application?

Small claims cases (typically under $10,000) are less concerning than major litigation, but you should still disclose them. If they don't affect property title and amounts are small, impact is usually minimal.