Effects of Home Equity Line in Default

What recourse does a Bank have on a defaulted home equity line of credit?

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Bill's Answer: Bills.com Resident Expert

The fact that the bank never recorded a lien on your property does not prevent them from doing so now, even though more than one year has passed from the date of default. Generally speaking, a creditor must take action on any defaulted contract within the statute of limitations provided by each state, which varies from three to 15 years from the date of last payment, depending on the state and type of debt. Some states have separate rules for mortgage deficiencies, which you can see in the Bills.com Anti-Deficiency resource. For more information about the statute of limitations in your state, see the Bills.com resources Collection Laws & Exemptions by State and Statute of Limitations on Debt.

In most states, a creditor that has extended credit to you secured by your home must still file a lawsuit against you to force you from the property. Since only one year has passed since the date of default, it is unlikely that the statute of limitations has passed, and therefore the creditor could potentially file a lawsuit to foreclose on your property. Given the complexity of this situation, I highly encourage you to consult with an attorney as soon as possible to find out what action the creditor may take against your under your state’s laws, and what recourse is available to you.

Just because a loan is secured on your home does not necessarily mean that the creditor will attempt to foreclose on the property. Home equity lenders and second mortgage holders frequently choose to pursue a standard lawsuit to obtain a money judgment rather than proceeding with foreclosure action. These types of loans are considered “junior encumbrances” to your first mortgage, and in order to foreclose, these lenders are required to pay your first mortgage off before auctioning the property. Depending on the amount of your first mortgage and the amount that the lender can obtain for the property at auction, this type of foreclosure can actually cause a home equity or second mortgage lender to lose money.

Since more than a year has passed and the lender has taken no action to foreclose on the property, I would be surprised if the creditor attempts to proceed with foreclosure. However, as I mentioned previously, I highly encourage you to consult with an attorney to discuss the situation and your options. Even if the creditor does not foreclose, if they sued you and obtained a judgment against you, the creditor may be able to garnish your wages, levy your bank accounts, or attempt to seize other property you own. As you can see, the consequences of a lawsuit can be quite serious, even if the lawsuit does not result in foreclosure, so I would encourage you to take steps to resolve this debt as quickly as possible. You may want to set up a payment arrangement with the creditor, or you may even want to consider filing for bankruptcy protection. Again, these are options you will need to discuss with your attorney to determine which possible solution is the best for your situation. For more information about bankruptcy, I encourage you to visit the Bills.com Bankruptcy Information Page.

If you would like to read more about foreclosure action, and for options available to consumers facing foreclosure, you should visit our Foreclosure Resource Page.

I hope this information helps you Find. Learn & Save.




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Comments (79)

Jane P.
Oakland, CA  |  June 14, 2013
I live in California and I owe almost $70,000 on my HELOC (just received the letter in the mail because my 10 years is up), I have a credit score that I just viewed that is in the 500s, and the letter is stating that I need to pay the whole amount by mid-July. I do not have the money and trying not to stress out but I do not want my home to go into foreclosure. I have called HARP and was told to fill out the application anyway. However I know that a credit score of 620 is needed. My highest of the 3 is 597. I also just called the loan company and was told to fill out their application. Right now and all day I will be looking into this matter. I’ve been in my home for over 30 years and again, a foreclosure cannot be an option. …Additionally, I also make my mortgage payments on time while paying a little more than the interest on my HELOC. Please offer me any free assistance. It is much appreciated
June 18, 2013
I recommend that you speak to a counselor at HOPENOW, 888-995-4673. They offer free counseling and are HUD approved.
Carol G.
Artesia, CA  |  April 10, 2013
We short-sold our primary home in Feb 2010. Since then we have received phone calls regarding our second line of credit that was in default at the time of short sale. Our last payment for our HELOC was in Oct of 2009, making our SOL expiration Nov 2013. We recently received a letter saying that if we pay 20% of our last HELOC balance ~$20k, the bank would report this debt paid in full for less than full balance. Should we take the offer? Will speaking with the bank now reset the clock on the SOL?
April 11, 2013
There may be several relevant facts not mentioned in your message that would change an analysis of your situation. The most important are what, if any, promises you made to the HELOC lender in the February 2010 short sale. In the short sales I've seen, all lenders have their say in the short sale. It would amaze me to learn you were able to short-sell the home without promising a payment plan to the HELOC lender. If my assumption is correct, then the HELOC lender will argue to a court, probably successfully, that the statute of limitations on the HELOC starts not in October 2009 when you stopped making the payments, but sometime after February 2010. Consult with a lawyer who has experience negotiating with mortgage lenders to learn what your liabilities are under the short-sale deal you signed, and when the statute of limitations clock started for the HELOC. On to your question about accepting the settlement offer.

Bills.com readers have reported to us that junior mortgage lenders are accepting near-zero to 15 cents on the dollar to settle deficiency balances on foreclosures and short sales. Therefore, the lender's offer of 20 cents on the dollar is not a great deal, but it's a fair start to a negotiation. Negotiations will not restart a statute of limitations clock. Any lender who claims such is being untruthful.

You indicated you reside in California. For the benefit of other California readers, the California legislature changed the anti-deficiency law for short sales in mid-2011 to outlaw the collection of deficiency balances on both senior and junior home loans. See the Bills.com resource California Short Sale & Deficiency Balance to learn more.

November 23, 2011
I live in California. I own a house in New Mexico that is worth about 125K I owe 149K. I got in on an 80/20Heloc. The HELOC is 28K that just started it's repayment plan. (I had no idea thanks to mortgage idiot) If I default on the HELOC can they put a lien on my property here in California? What to do?
November 24, 2011
Keep paying the loan. If you wish to keep your refinancing options open for your first mortgage under the new HARP program, then you must be current on your payments. Bills.com has updated information on the HARP 2.0 program. If you qualify, then you may be able to lower you payments on the first mortgage.

I am not sure what you mean by "the repayment just started now". Were you making interest only payments? If the payment schedule in not manageable then you should speak to the lender and see if you can negotiate a loan modification. The more that you convince the lender that you are facing financial hardship, the more likely you will be able to negotiate a change in the loan payments.

If you default on the loan then the lender will have the option to foreclose on the property and pursue any deficiency balance. This can mean that the lender can seek a court judgment and, if it obtains the judgment, place a lien on your property in California, along with taking other actions to collect on the debt, such as garnishing wages and levying bank accounts. New Mexico does have a deficiency recovery restriction in low-income cases, Check with a lawyer to see if that is applicable to your case.
Golden Valley, MN  |  November 17, 2011
I have a HELOC that is delinquent in MN. Can the bank garnish my wages as opposed to trying to buy the first mortgage and then foreclose?
November 17, 2011
A HELOC is a form of mortgage. Here, it is a junior or second mortgage. A junior mortgagee may foreclose. See the Bills.com resource Second Mortgage Foreclosure for a discussion of this issue.

If a lender forecloses, which results in a deficiency balance, the lender can sue the borrower unless an anti-deficiency law prevents the lender from doing so. If the lender sues the borrower and wins, it can use the resulting judgment to collect the debt. See the links I just mentioned to learn more about each of these subjects.
Loretta S.
Birmingham, AL  |  July 31, 2011
I brought a home with cash money in 1989 with my first husband. I later got married again to my second husband , and we took out a loan with a credit union in 1998, in which they say it was a mortgage.before I took this loan out I had a secured loan with a bank in which I received a mortgage satisfy letter. I did a title search in 2008 ,and my 1st husband was still listed on the title. He didn't pass away until 2000. I filed bankrutcy in 2005 and I received a discharge from this debt. I was not told to reaffirm this debt.I continue to pay but I later felt that I shouldn't be paying this loan and it also was affirmed by the probate secretary. I stop paying for about a year, and the credit union ask me to move out. I did a year ago, but the house is still there not being occupied by anyone. now the credit union name was not on my deed or title. yes they did have a mortgage recorded at the court house, but it was for a different amount and different terms. several years this was not on my credit that I had a mortgage, but when they faulty foreclose on my home it came on my credit report. I had this investigated by the credit bureau, just a few months ago, and now the mortgage was taken off of my credit report, also this mortgage loan they they claim me and my second husband had, never showed on his credit report to this day. please tell me if this was a mortgage or loan that was discharge in my chpt 7 bankruptcy.my husband was not included in my bankruptcy. but he had filed bankruptcy several years prior to me filing. please comment.Thanks in advance!!!:)
August 01, 2011
Loretta, your set of facts is so complicated that you need to speak with a lawyer to get a proper answer. Start by speaking with the lawyer that assisted you in your bankruptcy filing.
Doug V.
San Francisco, CA  |  July 12, 2011
Hi Bill, my Chapter 7 bankruptcy was finalized in December 2010 and I'm currently in my third month of trial modification for my primary mortgage through Chase. However, I am currently 3 months in default with my HELOC through Wells Fargo. I am now able to resume payments again on my HELOC but Wells Fargo has already deemed my account non-active and closed it. What actions can Wells Fargo take and will this default jeopardize my potential permanent modification through Chase?
July 13, 2011
A HELOC is a form of second mortgage. Please see the Bills.com resource Second Mortgage Foreclosure, and in particular the reader comments, to learn more about which options are at Wells Fargo's disposal. Whether Chase decides to change course because of your delinquent HELOC is up to Chase.
Tam A.
Mount Vernon, WA  |  June 23, 2011
We have our primary residence in AZ and another home in WA with a home equity line of credit. The home has a balance of $114k and line of credit $65k. We've looked into selling but have been told the home is currently only worth $150k. This amount would pay off the primary loan but not enough for the line of credit. We are looking at foreclosure and need to know if the line of credit lender can come after us or other home in AZ. Any input?
June 24, 2011
This is, unfortunately, a popular subject. A HELOC is, for all intents and purposes, a form of second mortgage. Please see the following Bills.com resources for extensive discussions of the issues you raised in your questions:

Please post any follow-up questions you may have on the appropriate page.

Dan H.
Victoria, MN  |  June 14, 2011
Dear Bill - I am going through foreclosure of a property in Minnesota and I also have a home equity line of credit. I am a British national and have moved back to the UK. I don't expect the auction to raise enough capital to pay off both lines of credit. What is the likely outcome, given that I am now in the UK? Can I be pursued for any outstanding balances?
June 14, 2011
See the Bills.com resource Domesticate a Judgment Overseas for a discussion of the issue you raised.
Shane S.
Wharton, OH  |  June 11, 2011
Lets start with i owned 3 homes in California when i lost work and moved to Ohio. After struggling to make the payments, I tried and after almost 2 years sold my largest and most expense home at short sale. Needles to say i had a personal friend who owed me a large sum of money file bankruptcy, and the house i sold at short sale hit me with a deficiency judgement, i am forced to file bankruptcy. I would like to keep the other two homes i own in CA but my bankruptcy lawyer says i can if the rents dont equal the payments, which they dont, but not by much and in 25 years i will own them free and clear. The one home is with B of A and is worth about 200k with a first of 260k and the second of 60k. This home is 4 months behind and B of A hasnt done anything besides threaten foreclosure (it was an 80/15/5 with the second a heloc at time of close). My other home is what i really have a question about. This was my first house with an original first of about 165k and a second (HELOC) of 170k. Homes value is 160k. My first is with Guild and second is with Wells Fargo, formally a Wachovia loan. First is current and second is 4 months behind. Tried to do modification but first wont so second wont. Since i am going to file bankruptcy, can i wait for the second to charge this loan off then include it in the bankruptcy? Will i only owe on the first then? Will they still hold title? Can i then just reaffirm the first. I have asked my BK lawyer these questions.. ( i have seen 4 and this one the fifth, seems to be most knowledgeable but living in Ohio, shes is not sure how the home in CA will be treated and she says its sometimes up to the judge and his mood that day). Would it be better for the BK to just short sale these to homes also. Thanks, Shane
June 14, 2011
Without knowing more about your intentions and the locations of the properties, it is difficult for me to offer an observation about your overall strategy. If the two properties are located in the central valley or Sacramento where home values continue to fall, then I would abandon the properties and allow a short sale or foreclosure immediately. If the properties are along the coast or the mountains where values have been a bit more stable, then you may see a recovery in the medium term (say, 10 years).

I realize you asked legal questions and I gave you an economic answer, but you mentioned you already received four answers from what I assume are four Ohio bankruptcy lawyers, who probably do not know anything about California's housing markets. Were it me, I would stop the bleeding.
Margaret G.
Port Richey, FL  |  June 03, 2011
We have our first mortgage of 200k, and an equity line through the same bank for 180k of which we have borrowed 120k. We are now at the point that foreclosure is on the near horizon. We are still current on all payments. My husband wants to pull the remaining 60k out of the equity line before everything is frozen. We can use this to pay our bills and hope for a reversal of fortune in the coming year. My question is, can we give any of that 60k to our adult son to purchase a place of his own? Could the bank come after him for the money if the mortgage and equity line ultimately fall into arrears and foreclosure?
June 03, 2011
Under common law, I lack the imagination to think of a legal means for the lender to make a claim against the recipient of a gift from a borrower. However, if the borrower does what you described and soon after files for bankruptcy, the bankruptcy trustee can unwind the gift. Consult with a lawyer in your state who can research your state's case law to learn if there is any court-made law on this issue.
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