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Information on Bankruptcy on HELOC After Foreclosure - The Bills.com Blog
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Information on Bankruptcy on HELOC After Foreclosure
Question: I have come into financial hardship with work and have had to take a pay cut.I have gone 60 days late on my first and second mortgage.I have been in constant communication with both lenders and the first is willing to work with me so I don't lose my home. The second loan is a HELOC and they said they have no programs to assist me.The 1st loan is$580,000 and the second is $220,000 for a total of $800,000. My home is now worth about $675,000.If I default then the only one who will recover their $$$ is the 1st lender. The 2nd will wind up with nothing after all the fees and foreclosure costs.Is there any recourse for the 2nd lender to come after the funds if I file for bankruptcy after foreclosure?I would think they would rather settle for a smaller amount instead of possibly losing it all. This would help me as the homeowner and limit most of the loss of their loan if they settle for cents on the dollar. Am I crazy for thinking a lender would settle since it is a 2nd loan?
Answer: Honestly, the HELOC lender has very 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, you should visit bcsalliance.com .
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.
Since I am not an attorney, I am not in a position to provide legal advice, which is really what you need in these circumstances. Given the complexity of your situation, and the possible negative consequences that could result from making an incorrect decision, I strongly 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 wish you the best of luck in resolving this situation, and hope that the information I have provided helps you Find. Learn. Save.
Best,
Bill
www.bills.com/blog
Also, make sure to get a free financial health check-up with Bills IQ!
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1. Posted by lynn on Tuesday 24th June 2008 09:48
We had the same situation. It was just before the subprime crisis. THe HELOC was suprime, with mortgagne insurance, and we got no HUD statement. The funds went to a builder directly and we lost all the money. The HELOC lender was totally uncooperative. We called them 20 times, wrote letters, had an attorney and realtor call them. We got one offer on the house in 6 months, and almost lost it because the bank would not answer whether they would approve the short sale or not. AFter blowing two deadlines of the offer, they finally gave us an answer and approved the short sale. They are not after us for the large balance on the HELOC.