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Question:
MAR 17, 2012

Information on Bankruptcy on HELOC After Foreclosure

Is there any recourse for my second mortgage lender to come after the funds if I file for bankruptcy after foreclosure?

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Bill's Answer: Bills.com Resident Expert

The HELOC lender has little recourse against you in the situation you describe. If you allow your home to go into foreclosure, and the home equity loan is not paid through the foreclosure sale, the HELOC will become an unsecured obligation. If you took no action after the foreclosure, the home equity lender could pursue collection action against you, including possibly filing a lawsuit against you to obtain a judgment for the balance of the debt. If the creditor obtains a judgment, it may be able to garnish your wages, levy your bank accounts, and place liens on any property you own, depending on your state’s laws regarding the collection of judgments.

For more information about what assets are protected from creditors in your state, see the Bills.com State Statutes of Limitations page. These exemptions also apply to individuals filing for Chapter 7 bankruptcy protection, so you should also carefully review these laws since you are considering filing a bankruptcy petition.

After foreclosure, the remaining unsecured debt owed on your HELOC should be dischargeable in bankruptcy, so filing for bankruptcy should protect you from any collection action taken by your equity lender. However, your ability to file for bankruptcy protection will depend on your income, assets, and numerous other factors which you must carefully consider to determine if bankruptcy is the best solution to your problem. I strongly encourage you to consult with a qualified bankruptcy attorney to help you figure out if bankruptcy is a good choice for you, and if so, which type of bankruptcy you should file. I also invite you to visit the Bills.com Bankruptcy page, where you will find a wealth of educational information about bankruptcy and other options available to people struggling with debt.

Given the fact that you owe so much more on your home than the property is currently worth, you may wish to consider selling the property before you are forced into foreclosure, and including any deficiency balance in your bankruptcy filing. In order to sell the property for less than you owe, your lenders will need to approve a "short sale" of the home, meaning that the lender will allow you to sell the home for less that you actually owe. If your lenders will approve a short sale, you may be able to go ahead and sell the home, and file bankruptcy on any debt remaining after the short sale. It is unfortunate that you are stuck owing so much more money than your home is actually worth, but your bankruptcy attorney may be able to help you work out a plan to sell the property and resolve the remaining debt.

Given the complexity of your situation, and the possible negative consequences that could result from making an incorrect decision, I encourage you to consult with an attorney in your area as soon as possible. You should ask the questions you have posed here to your attorney to obtain a legal opinion of the best course of action available to you. Your attorney may also be able to negotiate with your home equity lender to reach a settlement of your outstanding debt. While the lender has thus far been unwilling to negotiate with you, they may be willing to work with your attorney, as they may see your contacting a bankruptcy attorney as a sign that you are truly in dire financial straits.

For more information about foreclosure, I encourage you to visit the Bills.com Foreclosure page. I hope this information helps you Find. Learn & Save.

Best,

Bill

Bills.com

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Comments (53)


Janina C.
Des Plaines, IL  |  March 17, 2012
Short sale after bankruptcy is a mistake. My “closing” will probably take place soon but if I knew 6 months ago what I know now, I would never involved myself with that MESS. I had FHA mortgage that was discharged in chapter 7 over a year ago but hoping to settle the account with the Condominium Association, to spare my neighbors seeing foreclosure notice on the next door unit and to receive enough money from the PNC bank to cover my relocation expenses, I got involved with so called “short sale” . I bought the one-bedroom unit for $116,000 in 2003, in 2010 when I stopped making mortgage payments the value of the same unit was around $60,000, now the unit is selling at $44,500. In 2010 my outstanding loan balance was about $98,000 and I called PNC requesting the reduction of the home loan principal to match the actual value of my place. I was told that they do not offer that type of the “loan modification option” . They have not received a monthly payment of my home loan since. Here is the “almost final HUD statement” so you can judge for yourself if going through all that hustle for nothing is worth your time.
  • Sale price: $44,500
  • PNC net proceeds: $36,250
  • Realtor commission: $2,670
  • Title Insurance Fee: $1,450
  • Legal Fee: $750 (I heard this is 50% of what they usually charge)
  • Unpaid assessments (I stopped payment the association assessment 10 weeks ago) $818
  • Seller Incentive $925

This means that all I am receiving is $925. Since the mortgage loan has been already discharged I am not even interested in any favors from the bank. They cannot collect any money from me even if their sale net proceeds were zero. I am angry, disappointed and actually upset with myself. I was simply stupid. I should have just stay here until the very end, let that “greedy PNC Bank” go through the foreclosure proceedings and maybe sell my unit at the auction for half what they are getting now.

So stay in your house or condominium as long as you can, save your money and let the sheriff kiss you goodbye. You credit is already very bad and it cannot really get any worse no matter how nice as a human being you are. Do not let others make money on your misery, specially that bank that was never good to you anyway. After all, the bank is not losing anything, do not fall into any “short sale” promises, and represent only your own interest. Good luck and be smarter than I was! Janina

Krissie G.
Champaign, IL  |  December 23, 2011
My husband and I bought our condo in Chicago at its peak, for 223K. We currently owe 187K on the first with Chase and 44k on the 2nd with Chase. The condo market has dropped and our home is valued at around 65K. We've had it up for short sale for about 11 months now and have only gotten 2 offers. One for $55K that Chase already turned down and another current offer at $43k. We are no longer living in the condo because we had to move for our jobs and own the home (have a mortgage on) we are currently in. Questions: trying to decide on bankruptcy but here are the factors -we both make more than the IL gross income of $66k a year and have no credit card debt....only the 2 homes, 1 vehicle, student loan and a personal loan. 1. Would it make sense to take a 6 month leave of absence from work to reduce our income to just under the 66k gross and then file for bankruptcy after that? 2. If the short sale is completed, is it best to file immediately after once a payback loan amount has been settled for the 2nd? 3.Could I have a lien put on my current home and if so should I consider selling the current home and just renting? On paper we make too much money but my 18 month son was just diagnosed with a chronic disease and the majority of my money and time is spent on copays, meds and care for him which would make it difficult for us to pay back whatever loan the 2nd settles on. Thanks for your help, I don't know what to do.
Bills.com
December 28, 2011
You must address a few issues, as follows:
  1. Deficiency balance
  2. Covering everyday costs
  3. Protecting your assets

Deficiency balance: You will be liable for a deficiency balance on both your first and second mortgages, unless you negotiate a settlement, before selling the property. If you proceed with a short sale, make sure that your first mortgage lender, will include an anti-deficiency clause in your agreement. Remember, forgiveness of the debt, may create a tax liability.

Cash Flow: You suggested that stopping work for 6 months may help you in a bankruptcy procedure. If you are contemplating filing for bankruptcy, I strongly recommend that you speak with a bankruptcy lawyer to see if your strategy could possibly succeed. However, it seems to me that by not working you will create a tremendous burden on yourself, and probably create more debt and would have problems meeting your other obligations. If you are left with debt, upon selling the house, then review your debt relief options. It might be wiser to reach a settlement with the creditors.

Protecting your assets: If you default on a loan, then the creditor will seek a court judgment that can lead to a lien on your current house. That does not mean that you will be forced to sell the house. If you have equity in the house, then you will want to consider how best to use it to cover your debts, and manage your daily budget.

Marc F.
December 02, 2011
My chapter 7 was discharged in February 09. About 8 months ago I noticed my mortgage was not reaffirmed, I thought it was and I have been making the monthly payments. Either way it is showing up on my credit as under the bankruptcy. If I stop making payments on it how will it affect my credit report, as of now my credit is very good now that the bankruptcy is past two years, I know I will not be held liable but am still wondering about my credit report. Thanks for the help
Bills.com
December 03, 2011
I recommend that you read Bills.com page about reaffirming a mortgage. It sounds as if you chose to retain the property and maintain the payments. If you intend to continue to make the payments, then your credit report will reflect those payments. If you stop making those payments, then your credit report will be negatively impacted.

If you did not reaffirm the mortgage, then, as you stated, you should have no personal liability on the loan. It concerns me that you thought that your mortgage loan was reaffirmed but now you feel that it was not. Check with your bankruptcy lawyer, to find out what your exact position is regarding the reaffirmation of your mortgage loan.
Rosita S.
Crofton, MD  |  October 27, 2011
Financial hardship has made it difficult to afford home; for nearly a year now I have requested several remediies/assistance from my lender - SPS mtg has denied 2 loan modification requests; short sale and as of last month a deed in lieu of becuase the 2nd mtg company (GMAC) would not accept the $4,000 offer from SPS (GMAC wanted $8K). Last week I was told by SPS that they would consider me for their keys for cash program then I received a notice that they have denied that as well because the "forclosure date has been cancelled". I am so frustrated and don't know what to do at this point. I have recently moved out of the house and am renting an apartment. I have 2 questions: 1)what if anything do I do know, just sit an wait on SPS to foreclose or is there something else I should be doing...I don't want/cant afford the home but I am lost? 2)I live in MD, what happens upon foreclosure, can/will both lenders come after me for money and if so should I consider bankruptcy now before they come or afterwards? Thank you, this is such an awesome sight for folks like me that are clueless.
Bills.com
October 28, 2011
Questions like these are difficult or impossible for outsiders like me to answer because I have no insights into what your mortgage servicer has planned. Based on the behavior you described, it appears even it does not know what its priorities may be. You lost some leverage when you quit the property, and if the servicer realizes you no longer reside in the property it may not offer you a cash for keys contract.

Maryland does not protect its residents with a anti-deficiency law.
Chris C.
Fanwood Borough, NJ  |  October 13, 2011
I was divorced 2 years ago leaving my house with my wife and two kids. I got an apartment and paid rent for a year before moving into my new girlfriend's apartment. Within the 2 years my ex wife stayed at my old house without paying a dime towards the mortgage while collecting child support at the same time. My $275,000 house has now gone through the foreclosure proceedings and the bank now owns it. Our second mortgage of $40,000 was also wiped off our account at the moment. I have two more years of car payments equaling $7000 and my credit card is now $11300. I pay all my bills on time with the exception of my mortgage. I've already seen first hand what interest rates the banks are offering me if I decide to trade in or buy another car. Since my credit is shot for the next 4-7 years, would it be wise to file for bankruptcy at this point?
Bills.com
October 14, 2011
In my opinion, no. I hasten to recommend you consult with a bankruptcy lawyer immediately who can look at your facts and situation in more depth.

Why not now? Because you do not know how aggressive the first and second mortgagees will pursue you for what I assume is the deficiency balance on your property. If the mortgagees plan to cancel or forgive the deficiencies, then the bankruptcy would be pointless, with the exception of the credit card debt.
Markus H.
The Woodlands, TX  |  September 23, 2011
My house was foreclosed on in 2010 after we walked away in 2008. There were 2 loans on the property and I was just advised by the creditor that I owe them $76,000 roughly up to $100,000 in fees but would would let me settle for $25,000 and if I could give them $5000 down. I explained that my wife was not employed and we have a two month infant and I cannot afford to give them that kind of money - does bankruptcy help in any way?
Bills.com
September 23, 2011
Consult with a bankruptcy lawyer to learn if you qualify for chapter 7, and indeed, what liability you may or may not have for the deficiency balance.
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Markus H.
The Woodlands, TX  |  September 25, 2011
The loan in question was for a house in Florida and I now reside in Texas,do I have to file for Bankruptcy in Florida or can it be done in Texas? Thanks
Bills.com
September 25, 2011
The venue you need to file in is determined by federal law, 11 U.S. Code § 1408.

The rule states that you should file where you "have been located for the one hundred and eighty days immediately preceding such commencement, or for a longer portion of such one-hundred-and-eighty-day period than the domicile, residence, or principal place of business, in the United States, or principal assets in the United States, of such person were located in any other district."

Although it seems clear that you should file where you have made your residence for 91 or more days of the past 180 days, make sure to consult with a bankruptcy attorney to be certain that you are doing things properly.
Delilah E.
Surprise, AZ  |  September 13, 2011
I have a complicated situation, My X and I bought a home together, never married. We pulled a 2nd on the house that wasnt fully invested into the home.The home is also currently 70,000 upside down including 2nd. It has been 4 years since I moved out and after years of hardship, remodification and him still struggling to keep up the monthly and wanting to keep the home. I feel stuck. I am thinking the best resolution for myself would be to file chapter 7 bankruptcy for myself. Where would this leave me finacial with the 1st and the 2nd on the home, both at Desert school cu. He is going to try keeping the home and in hope with his graduation 11/11 will help him over come the hardship he has been face with. If it does go to forclosure were would we stand if I do file? If we both indiviualy file for bankruptcy were do we stand? Help!
Bills.com
September 13, 2011
I do not understand what you mean when you write, "We pulled a 2nd on the house that wasnt fully invested into the home." Nevertheless, I will offer an opinion, based on the assumption that you are a cosigner on one or more mortgages or deeds of trust.

Filing for a Chapter 7 bankruptcy, if you qualify, will remove the personal liability you have for any loans you signed or cosigned on. Doing so will not impact the other cosigners' credit scores or liability. If you file for bankruptcy, and the liability for the home loans is discharged, then any subsequent actions by the other cosigners, such as allowing a foreclosure, will have no impact on you.

Filing for bankruptcy is not to be taken lightly or done casually. On the other hand, it is not a traumatic event that will scar you for life. After your credit score recovers, you will qualify for a mortgage again, find jobs, and so on. The fact that you can explain the situation in one sentence — "I cosigned for a mortgage with my boyfriend, we broke up, and he could not refinance so I filed for chapter 7 to remove my liability," — is not an unusual story.
Matthew G.
Miami, FL  |  May 23, 2011
Over the past couple years, I have run into financial hardship (didnt get paid for 2 years). I placed my house in Florida under short sale last year. I was able to get 2 offers. However my 1st (flagstar bank) was too slow in their process of accepting the shortsale and decided to foreclose on the property. I had 100k with the 1st and 92k with the 2nd (heloc) (BOA) I have been recieving phone calls from the collection agency for BOA. they are trying to work with me to settle on the 92k. They are offering 12-15k. I am burdened with many other debts, and I am trying to rebuild my situation. Should I settle with the collection agency? I am not able to come up with the 12k though. Do you think for the 92k amount owed that BOA will sue for the amount? Any help would be appreciated.
Bills.com
May 24, 2011
I cannot predict if a particular mortgage servicer will file a lawsuit against a homeowner for a deficiency balance. Settling a $92,000 debt for $12,000 is a great deal — if you can afford it. You do not mention your other debts, but if they are unsecured, use the interactive Debt Coach tool to see your options for resolving your debt.
Raelynn M.
Manassas, VA  |  May 09, 2011
I declared a bankruptcy, which supposedly my HELOC was included in. Then I had to do a foreclosure. Can the HELOC come after me now? No home....
Bills.com
May 09, 2011
Ask your bankruptcy lawyer for a copy of the discharge document. Alternatively, ask your lawyer if the HELOC was included in the bankruptcy, and its disposition.
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Bills.com
September 28, 2010
Bank of America cannot report the account as current to the credit reporting agencies. It should have charged-off the HELOC 18 months ago and reported the HELOC as such. Why? The Federal Financial Institutions Examination Council (FFIEC) Uniform Retail Credit Classification and Account Management Policy states that "actual credit losses on individual retail loans should be recorded when the institution becomes aware of the loss." According to OCC Bulletin 2000-20 "... closed-end loans (must) be charged off when 120 days past due and that open-end credit be charged off when 180 days past due." You mentioned that Bank of America had both mortgages. That is irrelevant for the purposes of your question.
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Malani G.
Milpitas, CA  |  March 10, 2011
Hi, We have a HELOC on a house that got foreclosed. The HELOC is 180k with citibank. However now the loan has been either bought or citi has a hired a collection agency (penncro). We are going to be hiring a lawyer to help us settle with the Collection Agency. We have only 30K in cash .. do you think the Collection Agency would settle for that amount ? We dont qualify for BK as we have another home we live in and a rental property. Any advise would be appreciated.
Bills.com
March 10, 2011
Expect the collection agent to ask for a financial disclosure. If $30,000 is really all you can afford, then you have little to lose by giving it a full disclosure. If you show $30,000 is all you have, then that is the maximum the collection agent can expect in a settlement. Go back to your bankruptcy attorney and discuss any scenario where bankruptcy is a viable option. I am not suggesting you will file for bankruptcy, but you would be in a better negotiating position if you had both a carrot (the $30,000) and a stick (possible bankruptcy) on the negotiating table. Do not just use the work "bankruptcy" expecting to intimidate the collection agent. Explain, if bankruptcy is a possibility, how you will be driven to bankruptcy if you cannot reach an agreement.

If the collection agent believes the maximum available is $30,000 and the only alternative is zero, then it will accept the $30,000. See the Bills.com resource Negotiate Mortgage Settlement to learn more about this process.
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Malani G.
Milpitas, CA  |  March 10, 2011
Hi, Thanks for your response. So we do have more then 30K in our 401k but we are no where near 65 and can not withdraw. The only amount the 401k administrator who is fidelity will let us loan is 30K. On our credit it shows a foreclosure which is the house that this HELOC was originally tied to. OUr credit does not show any assets. We are def using a BK Attorney who has done this before. Can the creditor take me to court even if the lawyer is negotiating .. meaning in the middle of the negotiation would they just start to garnish wages?
Bills.com
March 10, 2011
Your wages can't be garnished for this kind of debt, unless the creditor first obtains a judgment against you, after suing you. (See the Bills.com resource collections advice to learn more about the process.) The creditor could take you to court even while your attorney is negotiating with the creditor on your behalf, but that would be bad form and would destroy the negotiations process. Therefore, if talks are fruitful do not expect the other side to do anything to derail negotiations.

See the Bills.com resource California Collection Laws to learn more about your rights and liabilities.
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Malani G.
Saratoga, CA  |  March 10, 2011
hi . I am so stressed about this..what financial info will the collection agency have.. we do have a good amount of money in our 401k but can not take it out.. other then the 30k. other then that we have our current house which might have equity of 20k and a rental property in AZ which is upside down
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Malani G.
Saratoga, CA  |  March 10, 2011
hi, what would be included in the financial disclosure? would i have to show how much is in my 401k?
Bills.com
March 10, 2011
Make a complete disclosure, especially if your disclosure includes language to the effect that you are making a sworn statement regarding the disclosure's completeness and accuracy. However, think twice or three times about offering any amount from your retirement accounts. Why? Were you to file bankruptcy, your retirement accounts would be exempt from inclusion in your list of assets. It would be unrealistic and unfair for the collection agent to ask you to withdraw retirement funds to pay the deficiency balance.
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Alex C.
Dublin, CA  |  March 17, 2011
Hi, 1st of, GREAT SITE! I stumbled across this site simply by searching and there are TONS OF INFO here. Question: I foreclosed on a property in CA this year and just received the 1099C from WF. I have 2 loans with WF (1st = $430k, 2nd HELOC (Recourse)= $104k). The house was sold for $356k. My question is how long does it take for the bank to either file for a deficiency judgment or send it to collection agency? I haven't heard or received anything in the mail from either WF or a Collection Agency. Thanks in advance!
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Alex C.
Dublin, CA  |  March 17, 2011
Hi Malani, If you don't mind me asking, how long did it take for your HELOC loan to get transfered to a collection agency from the time your house was forclosed and how did you find out? I'm in a very similar situation to you. My house was forclosed this year. I've received the 1099C from WF but haven't heard anything else relating to collection agency. Thanks for your time!
Bills.com
March 18, 2011
As an aside, if your home was foreclosed on in 2011, then any tax implications will be dealt with on your 2011 tax return that is due in April of 2012. I think that you should ask your tax adviser this year whether you meet the IRS' standards for insolvency that will allow you to NOT declare as income any amount on a 1099-C you receive. It may be the case that you need to take or avoid some specific actions, in order to not pay taxes on the debt that was forgiven. Finding this out now will allow you to position yourself to owe as little as possible in taxes next year.
Bills.com
March 18, 2011
Unfortunately, there is no uniform process or timeline. The system is overwhelmed with people who have had foreclosures, done a deed in lieu of foreclosure, or done or short sale and were left with a balance still owing. The lender may come after you for the deficiency balance or may not. If it does come after you, it could happen soon or sometime down the road.

While you did receive a 1099-C from Wells Fargo, it can be the case that a borrower never receive a 1099-C. It is crucial for people to know that not receiving a 1099-C does not mean that there will not be a tax obligation. For instance, the IRS could get a copy of the 1099-C, but the borrower does not. This happens all too frequently, sometimes due to the fact that the 1099-C is sent out to the borrower's old address. If this happens, the borrower may find out about a tax obligation a few years down the road, when a letter arrives from the IRS that states that some income that should have been reported for forgiven debt was not included on the tax return. When the IRS revises the return, to account for the additional income, the new amount of taxes due is calculated and then interest and penalties are added on. You can imagine how painful it is for someone who thought a bad situation was behind him or her to be hit with a large tax bill. In your case, being told that you did not declare $104,000 in income would result in a huge tax obligation that will have grown even further with interest and penalties by the time the IRS catches the error.

If your home was foreclosed on in 2011, then any tax implications will be dealt with on your 2011 tax return that is due in April of 2012. I think that you should ask your tax adviser this year whether you meet the IRS' standards for insolvency that will allow you to NOT declare as income any amount on a 1099-C you receive. It may be the case that you need to take or avoid some specific actions, in order to not pay taxes on the debt that was forgiven. Finding this out now will allow you to position yourself to owe as little as possible in taxes next year.
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Alex C.
Dublin, CA  |  March 18, 2011
Hi, Thanks for getting back to me. My man concern is obviously the judgment. I also own a home with my wife that we are living in. We bought the house right before I let go my previous house and I'm worried that WF would be a lien on my current house. Throughout the whole foreclosure process, I have simply try to ignore it by not thinking about it (after meeting w/ a few attorneys). I have 2 questions if could kindly give me your opinion. 1. Do you think I should take a more "proactive" approach and try to reach out the WF to settle or simply wait to see what they do? If they come w/ a judgement, then that would be time for me to seek a professional debt negotiator. 2. Anything I can do to protect my current house? Both my name and my wife are on the DEED and loan. As always, thanks!
Bills.com
March 21, 2011
You are not indemnified from harm, no matter the choice you make. If you contact WF, attempting to negotiate a settlement, you may draw more attention to yourself and cause them to pursue collections more aggressively. On the other hand, if you wait, the situation could deteriorate into aggressive collections anyway.

Regarding your current home, the level of protections you have depend on the state in which you reside. You can review the chart that lists the collection laws and exemptions by state.
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