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Effects of Home Equity Line in Default

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

There was a line of credit taken out on my property that i own with my spouse which I never signed or authorized. My spouse defaulted and the bank closed down the checking out for no explainable reason where the payments were being taken out of. However the loan was never recorded on the property. It has been well over one year now! Does the bank have any recourse on my property? Or can they sue my spouse only?

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Bill's Answer
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Updated: Sep 23, 2014

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  • A creditor that has extended credit secured by a home must foreclose to recover.

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.

Best,

Bill

Bills.com

79 Comments

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  • JP
    Jun, 2013
    Jane
    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
    0 Votes

    • BA
      Jun, 2013
      Bill
      I recommend that you speak to a counselor at HOPENOW, 888-995-4673. They offer free counseling and are HUD approved.
      0 Votes

  • CG
    Apr, 2013
    carol
    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?
    0 Votes

    • BA
      Apr, 2013
      Bill
      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.
      0 Votes

  • 35x35
    Nov, 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?
    0 Votes

    • BA
      Nov, 2011
      Bill
      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.
      0 Votes

  • JF
    Nov, 2011
    JC
    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?
    0 Votes

    • BA
      Nov, 2011
      Bill
      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.
      0 Votes

  • LS
    Jul, 2011
    loretta
    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!!!:)
    0 Votes

    • BA
      Aug, 2011
      Bill
      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.
      0 Votes