Effects of Home Equity Line in Default - The Bills.com Blog

I have just completed a chapter 7 bankruptcy. My property is worth 169,000. My first and second equal 265,000. I am still current with my first but I have defaulted on my HELOC. If I stay current with my first how long will it be before the creditor on the second will sue me. The balance on the first is 200,000 and the balance on the HELOC is 65,000.

The aware that the lender for your second mortgage can initaite foreclosure proceedings because of the default. The foreclosure process varies from state to state, but generally takes from 2 to 18 months. It all depends on the terms of your loan. However, normally if mortgage payments are not received within 150 days, the bank can proceed with the foreclosure process. The 2nd mortgage would be repaid after the first mortgage is paid in full. In fact, if the sale price is less than the value of the mortgages held against it, then in some states you could still owe an unsecured balance called a deficiency balance.

Dear Bill I let go a rental in Fl that I can't hold any more with a big negative . The first has not foreclosed on the house and the second lender is referring the loan to a collection company who just sent me a letter. 1.Will they settle for a lesser amount ( I owe 57K ) 2.I have no asset except my TX home ( which is homestead), my 401-K and my 2 cars ( worth about 30K)and now unemployed.What can they do to me if they are not willing to settle for less.Can they come and take all my furnitures and cars since they can not touch the house and the 401-K. 3. Am I allowed to keep 2 cars for me and my wife and is there a value limitation?

If the second lender wants to, it can file a lawsuit in court and obtain a judgement against you. Even though what you state in your question might be true, keep in mind that garnishment of the debtor's bank account is the main legal remedy still available to enforce judgments against consumers in Texas. Collection agencies actively utilize investigation and post-judgment discovery to uncover debtor bank accounts (for example, the Equifax SkipFinders program). It is always best to talk to the lender. It might take some work, but if the lender realizes that the available options are limited, there is no reason why they should not work with you towards an amicable settlement on the account.

Dear Bill Thank you for the advice. I did call them and they are willing to settle. What is the lowest percentage will they normally accept ? Of course they will 1099 me for the rest.Your input is very appreciated and help me a great deal in my negotiation Take care Alex

It really depends on their internal policies and your own financial situation (how much you make and what you own {if they skiptrace you and verify your assets and income}. A reasonable 'starting' place is to document your income & expenses and your financial hardship and pitch them a low settlement (25-40% to start). Also, do your research on the cancellation of debt income issue (there is a bunch at Bills.com) because if you are 'insolvent' at the time of settlement you can file a CODI form 982 and you may not be liable for any of your stated 1099 income... but check with your CPA or tax preparation firm. Best.

If I go into default on my first and 2nd lien in Illinois can the 2nd lender come after me for the 2nd lien default Let me rephrase this... I know the only recourse to the lender on the 1st lien is to take the home. Is that also true on the 2nd lien or can they come after me at a later date with a judgement or wage attachment or some other form of recourse?

After the 1st lender finishes the foreclosure proceedings, if there is any money left, it will be given to your second lender. But if the proceeds of the sale were not enough to cover the payment to the 2nd, then yes, they can still come after you for the balance. It is basically an unsecured debt (just like credit cards) and the lender can go after judgments and wage garnishments.

Dear Bill, I own my home in ca. I have first loan with C.W and Equity source Account with citibank. Iam trying to keep home. I've offered citibank settlment for my second which they rejected. Can 2nd loan come after my other assets or the second is secured by my property only.

It is almost certain that your second would not come after your other assets, unless you signed a very unusual loan agreement. They can, however, attempt to force a foreclosure process if they think that the remaining equity (after paying off the first) will pay back their loan. Good luck.

Hi Bill, I have a home in Fla that I live in and a second home in GA (both have mortgages). I have a equity line on my Fla. I use the equity line to repair the old home in GA..The company I work for is cutting back and I'm afraid I might loose my job. If that happens I will not be able to cover the mortgages. I owe 108k on the Fla home and 150k on the GA house and about 40K on the equity line. What would happen If I used the balance of my Equity line to pay off the GA home and relocate there) and defaulted on the one in Florida along with the equity line. The Fla home is worth around 300k-320k. Could they come after me?

If you took borrowed against the equity line on your FL home to pay off your GA home, then defaulted on the FL mortgage and home equity line, the creditor(s) holding your mortgage and equity lines in FL could sue you for defaulting on the loan agreements. If the FL creditors obtain judgments against you in FL, they could then move the courts in GA to domesticate the FL judgment, making it enforceable in GA. Once the judgment is domesticated in GA, the creditors could possibly move to force the sale of your home and other assets, as well as garnish your wages, freeze your bank accounts, etc. While it is unusual for a creditor to force the sale of a debtor’s home, if the home in GA is paid off, and the creditor knows that you used its money to pay off the loan, the creditor is probably more likely to be aggressive in executing on its judgment. In addition, if you tried to file bankruptcy on the debt, the lender could claim that the debt was incurred fraudulently, since you had no intention of paying it when you borrowed the money; this could cause the debt to be ruled non-dischargeable in bankruptcy. I strongly encourage you to consult with an attorney to discuss the dilemma you are facing with your homes. Your attorney may advise you that it would be better to pay off your FL home, if possible, as the protections for debtors are generally more generous in FL than that are in GA. Your attorney should be able to help you work out the safest and most financially sound solution to this problem. I wish you the best of luck!

My husband and I bought an resort rental property in 2006 in Tennessee. We have a 1st ($255,000) and an equity line ($35,000). As the property does not rent well, we have depleted our savings trying to keep it going. We are attempting to short sale, however, if we do receive an offer (may be 190's to low 200's) it will surely not cover both debts. I briefly heard that Tenn may be a debt forgiveness state. If so,how would this apply to our 1st and equity? Both loans are secured by the rental property only. Will we be liable for the balance on either loan? How about foreclosure in Tenn if it does not short sale? We live and own a home in California. Thank you so much for your time.

Thanks for visiting Bills.com, Shannon. From what I know of Tennessee foreclosure law, mortgage companies and other secured lenders can pursue borrowers for the collection of deficiency balances. If your vacation/rental property sells for less than your mortgage and other secured obligations, the lenders would likely have the legal ability to sue you for the portion of the debt not paid with sale proceeds. Thankfully for you, many mortgage companies have become much less aggressive about collecting deficiency balances since the economy took a turn for the worse. I strongly encourage you consult with an attorney licensed in Tennessee to discuss the problems you are having with your property; he should be able to tell you what problems may arise out of the short sale and what steps you can take to mitigate them. I wish you the best of luck.

I bought our primary house in WA state in 2006 with 332K first mortgage from USBank and 83K HELOAN from WellsFargo. We currently owe 72K on the HELOAN. My wife lost her job and I may also lose my job in a few weeks. If that happens, we will not be abble to keep our house and will let them forclose. We currently owe a total of 403K (331K first and 72K HELOAN) and our house is worth about 365K(zillow). We can not sell because of the difference and the commissions. I'm not sure what my options are and what assets they can come after after foreclosure. We have about 15K in savings(both my and wife's), 15K in stocks and 8K in 401Ks for both of us. any guidance is appreciated. We did not refinance and not taken any money out. We made extra payments in the amount of $10K in the last 2 years when times were good.

You still have several options. You need to call the lender and have a frank discussion with them about your situation. The 2 options that come to mind is a short sale and a Deed in Lieu of foreclosure. You can easily research more about these options online. You can also see if you qualify for a refinance as per the new plan announced by President Obama, you can visit this link to find out: http://www.financialstability.gov/makinghomeaffordable/refinance_eligibility.html

I am currently unemployeed. My house value has decreased below what I owe. I have a 1st for $234,000 and a HELOC for $67,000. Both are with Wells Fargo. How willing will Wells Fargo be if I utilize a "short sale" to get out of both loans? Help in Fresno

That will depend on the criteria that Wells fargo has set forth, for loan modifications. There is no way for us to guess what the outcome will be or how open they will be for this option. You should also try to see if you qualify for a modification based on the new plan announced by President Obama; you can check it here: http://www.makinghomeaffordable.gov/

My husband and I just short-saled our primary home and in the process of short selling our last investment property. Needless to say, the market in California (our primary home) and our Arizona properties resulted in negative cash flow, so we used the equity we had in our primary home (about $117k) to keep us afloat with 3 investment properties and our home. We eventually sold one with a huge loss, and the second we short-saled and the 3rd is in the process now of being foreclosed, though we have had 4 buyers and 2 cash buyers that eventually walked away from the deal because the bank was so slow to approve the sale. We were responsible, never late, never had foreclosures or bankruptcies or delinquencies. We even used our 401k and took some out thinking we could reduce our monthly payments, and paid off most of our credit cards (about $60k). These credit card companies immediately closed down our accounts or lowered the limit. Our Amex went from $16k limit to $2k as an example. Advanta just closed the card down without explanation after we paid it off. Then in December, my husband gets laid off. When our primary home was short-saled, our 2nd sent us a promissary note. Is this now an unsecured debt? Is bankruptcy our last recourse? As far as we can see, we have nothing to lose now. Even when we were responsible and paid everything in time or paid off our debts, we had absolutely no line of credit! Now that my husband has been laid off, we don't see how we can even manage. He is our sole income. And we were doing well with his executive salary. Now, we can't even qualify for a student loan for our daughter because of last year's income. And yet, we can't pay for her college or get a private loan to help her. Please explain to me the type of bankruptcy we should consider, what debts will be erased, and how will that affect our credit, or ability to "fix our credit" in the future, and are we be able to buy a home again in the future?

People recover from bankruptcy. A family member of mine filed for bankruptcy in the mid-1990s, and less than five years later bought a house and then got a student loan. This may not be typical for everyone but with discipline, hard work and smart use of credit people rebuild their FICO scores and lead normal lives. I am not suggesting that bankruptcy is your only option (it isn't) but it wouldn't hurt to learn more about the types of bankruptcy. Regarding the short sale, it's by definition that the first mortgage company forgives the deficiency balance. Any balance on the second mortgage is unsecured debt. However, a second mortgage may or may not be considered a "recourse loan." You need to learn more about the consequences of default on a second mortgage and California recourse loans. Finally, look into the Home Affordable Refinance Program for your primary residence.

Hi Bill. Thanks for taking my question. Almost underwater with my opt arm loan for 680k heloc for 74k tryng just to keep up with the min payment. Now very difficult because wife wants divorce. I cannot afford to continue to make payment along with child support,spousal support and a place for me to live. Am I better of filing ch 7 trying to get a loan mod or short sale? If a ch7 which my credit is stellar, how far will it be destroyed like my life right now. How long will it take before it comes back to good standing. Any help would be grateful.

I recommend that you read an article I wrote which discusses the differences between A Deed In Lieu Of Foreclosure vs. A Short Sale. Filing a chapter 7 bankruptcy does not necessarily mean you will be able to obtain a loan modification. Please read Bankruptcy Advice to Help Avoid Bankruptcy. If you are considering bankruptcy I suggest you speak with a licensed bankruptcy attorney in your state.

I have recently moved from a townhouse that is being financed by a HELOC - $183,000 - and moved into a home that is on a 30 year fixed mortgage - $225,000, the townhouse property value has dropped to $150,000. I was unable to attempt to sell the townhouse because I could not afford the loss and recently found out that I have to wait before I would be able to rent it out as a rental property due to HOA restrictions. If I cannot afford the payments on the townhouse anymore, being that is 100% financed with a HELOC, is a short sale or foreclosure an option? I do not know if it would be looked at the same way as a mortgage. I have the HELOC and mortgage company with the same lender WF.

I am not clear on the details of your situation. It is not clear whether the HELOC is secured against the town home or another property. That said, I can not provide you any advice. However, I wrote an article discussing this topic in detail. Please read A Deed In Lieu Of Foreclosure vs. A Short Sale.

I'm facing foreclosure on my house in CA , owe 680k on 1st mortgage and 150k on HELOC. The property is just under my name and the loans are also under my name, can the bank that I have HELOC with come after my spouse's assets.

California is a community property state, and this answer applies to community property states only. When did you acquire the mortgages? If you acquired the property or refinanced before marriage the debt may be considered your separate property. However, most debts incurred by either spouse during the marriage are owed by the community (the couple), even if only one spouse signed the paperwork for a debt. Your HELOC may be a non-recourse debt. See Is My HELOC a Recourse or Non-Recourse Loan in California? for more details.

My family member currently owes approximately $340K on a HELOC. He is unable to pay the bank, taxes, etc. We are not sure which course of action to take since he also owns a business. Bankruptcy may not be the best choice, but we are considering foreclosure. What kind of attorney or legal advice should we seek. Bankruptcy lawyer, financial advisor, ??

It appears your family member has three issues: 1) A HELOC he is not paying. He faces foreclosure on this debt if this issue is unresolved, 2) Delinquent tax payments. The IRS can place a levy or garnishment on your family member or his business if he does not pay his taxes, 3) I surmise he has a problematic business venture that may be causing financial distress. Suggest your family member consult with an attorney in your state who has experience in taxes or forming corporations. A financial adviser will not have the skill-set or training required to handle any of the three issues I mentioned.

I bought a rental property in 2006 in FL. I have a 1st ($240,000). As the property does not rent well, we have used our savings trying to keep it going. We are attempting to short sale, however, if we do receive an offer (may be $150's) it will surely not cover the debt. I briefly heard that FL may be a debt forgiveness state. If so,how would this apply to our 1st? The loan is secured by the rental property only. Will I be liable for the balance on the loan? How about foreclosure in FL if it does not short sale? We live and own a home & 2 other rentals in California. Thank you so much for your time.

To the best of my knowledge Florida does not have an anti-deficiency statute. Please see Florida §702.06 Deficiency decree; common-law suit to recover deficiency to read the statute. You are liable if there is a foreclosure and there is a deficiency balance. Regarding a short-sale, whether you are liable for the deficiency is dependent on the contract you sign with the creditor (the bank servicing the mortgage) for the short sale. Some short sales contain terms that forgive the deficiency, and others do not. Ask a Florida attorney to review the short sale contract and ask him or her to explain its terms to you before you sign the contract.

We have a 650k first with BOA and 250k second with WF. Our 1.4 million dollar home is no worth 700k. We are current on everything thanks to savings, both unemployed now, and running out of savings. Still have approx 75k in retirement and a 2nd home that is also upside down. Our wells Fargo is a secured loan yet we live in Hawaii. If we foreclose, can they come after our 401k for the second, we still have about $40,000 cash to live off of. It really isn't a matter of if, its just a matter of when we run out of funds.

Generally speaking, 401(k), IRA, and other retirement accounts may not be levied. Talk to the first mortgage holders about a short sale or deed in lieu of foreclosure.

I am a Florida broker working on a bank approved short sale, representing the buyers. The seller, after signing the FAR BAR, Short Sale Addendum and the Lender's Approval, decided on the day of closing NOT to sign. They have now said they have a fear of the bank perusing future savings for their child's college fund (Do not currently exist). Despite this being their primary residence and the bank clearly stated in signed Approval Letter that the Promissory Note would be for $0. What information is available that can help them feel comfortable with the completion of the short sale. Thank you so much for any help you can provide.

Ignoring the law for a moment, their reluctance to execute the contract makes no economic sense. By definition, as short sellers they are in economic distress in danger of default, which will result in foreclosure. In a Florida foreclosure, they will be responsible for the deficiency balance. In this short sale (if you are correct about the contract terms) they will not be responsible for a deficiency judgment. The reluctance to execute the agreement springs from fear of the unknown. The seller needs to bring the contract to an attorney in Florida who has experience in contract law. The attorney will review the contract with the seller line by line and explain his or her rights and liabilities. In particular, they need to review the section of the contract that concerns the deficiency balance.

Hi Bill. I have $58k in debt with 4 accounts. I am thinking about letting my Wells Fargo LOC at 13% go (not a HELOC.) Current Balance is $18k and limit is $30k. Was thinking about taking out the remaining $12k available and then letting the account charge off. That will leave me with $40k in debt (3 accts, 2 at 10.9% and 1 at 5.5% all 3 with the same Credit Union), I'd use the $12k to pay that down so I will be left with $28k which I can chip away at a lot easier than the $58k that I can't seem to make a dent in. I'd like to know what the repurcussions would be and if WF could come after me and how would it affect my credit and for how long (no current derogs but the other 3 accounts are maxed) What do you think I should do? I bought my home 1yr ago (currently upside down...I live in FL)and don't plan on applying for credit for anything within the next few years. Thank you for taking the time to offer your advise!

It is unclear to me if the LOC you referred to is a second mortgage, although you stated it is not a HELOC. If the Wells Fargo LOC is a species of second mortgage, I really, really dislike your idea because you are converting your unsecured debt into secured debt and consequently putting your home at risk of foreclosure. If the Wells Fargo LOC is not a second then I still dislike your idea because all you are doing is shuffling around your debt to one account that you plan to default on. "Letting go" of the account will not make the debt disappear. You need a better plan. See What Are My Debt Consolidation Options? to learn more.

thank you so much for taking the time to get back to me. i like your suggestions from the link provided and will look into those options further. stress is definitely getting the better of me right now! fyi - LOC is unsecured. thanks again Bill.

At what % is Wells Fargo likely to settle on a HELOC? It was just charged off, the 1st is in foreclosure and has motioned for summary judgment, and I informed Wells I'm filing ch 7 bankruptcy and sent them a copy of my paid agreement with a bk attorney. Is there a chart somewhere to see what the various banks are settling HELOCs at? Thanks.

If such a chart exists I would love to see it. Readers, if you know of one please let me know!

Hi Bill~ My husband and I live in Arizona and we have been trying to sell our home sence June of 2008.We are facing forclosure with BOA 732,000.00 on the first and Wells Fargo HELOC 150,000.00.Orginally BOA agreed to our short sale offer of 500,000.00 and Wells fargo agreed to 7000.00 from the short sale and 1000.00 from us.However, because the banks took so long to work together the buyer at the last minute walked away. my question to you is now that I have a May 21,2010 trustee sale with BOA, Wells Fargo just this week filed a law suit against us for the 150,000.00 line of credit.How can We fight this,how should I respond to them and do you think they will still take the 8000.00 offer they agreed to take from the short sale? Our only source of income comes from the VA and SSI.My husband is a 100% disabled veteran that is on the Portland liver transplant list.please help!!

Consult with an attorney in Arizona who has experience in bankruptcy. I am not saying that bankruptcy is your only option, but a bankruptcy attorney will be able to discuss all of your options with you, including whether you or your spouse are considered "judgment proof."