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Can Foreclosure On One Property Affect Another We Own?

If a bank forecloses on one house, can it attach a home equity loan on that house to another we own?

My husband and I have two homes. House No. 2 had a buyer with lease/option that fell through recently. We do not have the money to pay for two homes (rent will not cover mortgage). House No. 2 has a home equity loan attached to it. If we let it go back to the bank, can they attach the home equity on to House No. 1, the one we live in? We cannot sell House No. 2 for what we owe in this market.

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Updated: Oct 23, 2014

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Highlights

  • Foreclosure laws and anti-deficiency rules vary by state.
  • There is usually no link between an owner's two properties.

If you allow House No. 2 to go into foreclosure, it is likely the amount received at auction will be much less than what you actually owe, which could leave you responsible for the difference, generally referred to as a “deficiency balance.” See the Bills.com resource Anti-Deficiency to learn your state’s anti-deficiency rules.

One option that you may have to free yourself of this obligation without owing a deficiency balance is through a “short sale,” in which the mortgage holder agrees to accept less than the balance owed on the mortgage at sale to prevent foreclosure. The lender would much rather see you sell the property than be forced to take the property through foreclosure, as foreclosure is a costly and time-consuming process.

Contact your mortgage lender to discuss what it can do to assist you in selling through a short sale, and what are its procedures and requirements. Explain to the lender that you cannot afford your mortgage payments, and that you need to sell the property through a short sale to prevent foreclosure. To learn more about this option, see Deed In Lieu Of Foreclosure vs. Short Sale.

Foreclosure and Home Equity Loan

The answer to your question, and the best solution to your problem, depends greatly on your state of residence, as state laws regarding foreclosures and the enforcement of deficiency balances vary greatly from state to state. Although some states restrict the collection of deficiency balances, most states allow deficiencies to be treated like all other unsecured debts.

If you end up owing a deficiency balance on House No. 2, it is possible that the creditor may file a lawsuit against you to collect on the debt. If the court grants the creditor a judgment against you, the creditor may be able to garnish your wages, levy your bank accounts and/or place liens on your property, including your primary residence, depending on your state’s laws relating to the enforcement of judgments.

Also, if you allow House No. 2 to go into foreclosure, you can expect the foreclosure to appear on your credit report for seven years from the date it is entered into the public records, likely resulting in significant damage to your credit rating and your ability to obtain new credit.

State laws related to foreclosure and the collection of deficiency balances vary significantly, so I strongly encourage you to consult with an attorney in your area as soon as possible to discuss the problems you are facing. Your attorney should be able to tell you specifically what action the mortgage company can take to collect the debt if it obtains a judgment against you for a deficiency balance, and what actions you can take to protect your assets and mitigate the damage caused by the foreclosure.

Quick Tip

Each state legislature created unique foreclosure and anti-deficiency laws. Follow the links just mentioned to learn the foreclosure rules relevant to you.

Bankruptcy

You may be able to rid yourself of the obligation to continue paying on your second home by filing for bankruptcy protection. If you file for Chapter 7 bankruptcy, you may be able to surrender the property to the creditor and discharge any deficiency balance as part of your bankruptcy plan. However, you may risk losing that property as well, depending on your state’s property exemptions in bankruptcy. Again, I encourage you to consult with a lawyer who has property law experience to determine the best course of action available to you to resolve this outstanding debt. To learn more about bankruptcy, visit the Bills.com bankruptcy resources page.

Many Americans are struggling to keep their mortgages current during the economic downturn, so please know that you are by no means alone in the difficulties you face. You do not qualify for the Making Home Affordable program because your issue revolves around a second home, but I mention it here for readers who struggle with similar issues on their primary home.

Quick Tip

Debt distressing you? The Bills.com Debt Coach is a no-cost online tool that will analyze your debts and show you the options available to resolve them and the costs and benefits of each.

I wish you the best of luck in finding a workable solution to this problem, and hope that the information I have offered helps you Find. Learn. Save.

Best,

Bill

Bills.com

18 Comments

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  • MP
    Sep, 2013
    maria
    Hi, I bought a Florida condo in 2006 while I was single. And during the crisis of 2008-2009, i couldn't continue paying the mortgage and the bank started foreclosure procedures (just a few months after I got married) - I just received letter of the Final Judgment: the property will be put up for foreclosure sale in Dec. The amount originally owed was 120,000, with fees and interest, etc., the amount grew to $162,000. Even with today's improved housing market, that condo is not worth more than 60,000. My question is, what happens to the "deficiency"? - can they go after my husband's assets? (401K, his salary, etc). Can I go on bankruptcy without affecting my husband? - we file taxes jointly. I also own another smaller condo which is paid for and not worth more than 35-40K, can the bank take it to cover part of the deficiency? - We currently live out of state (in CA). Please advice. I'm really worried about ruining my husband excellent credit for my mistakes. I'm also pregnant and the stress is too much to bare. Thanks in advance for your help.
    0 Votes

    • BA
      Sep, 2013
      Bill
      Good news first: It is common for one spouse to have a sky-high FICO credit score and the other spouse to have a low FICO score. Marrying a person with a score higher or lower than yours will not cause an averaging effect. In other words, there is no such thing as a "marital credit score."

      Now the bad news: You mentioned you reside in California. California is a community property state. It is possible for an aggressive creditor to pursue you and your spouse for your separate, pre-marital debt. I want to qualify that by saying it's a legal possibility, and it's one most creditors are either unaware of or take the time and bother to pursue.

      You can file bankruptcy separately without your spouse filing, too. My advice? First, consult with a Florida lawyer who has experience dealing with mortgage law. Florida permits deficiency judgments, but the law has a couple of twists regarding how the deficiency amount is calculated. After you learn how much of deficiency you are facing, your second step is to consult with a California lawyer who practices bankruptcy law. It's too soon to file bankruptcy, but it's not too soon for you to understand the pluses and minuses of filing bankruptcy, and whether bankruptcy is your best option.

      One final thought: You are not alone in the situation you described. Tens of thousands of homeowners in Florida alone have gone or are going through foreclosure and its aftermath. Take the steps I suggested, and you will better understand your options moving forward, and perhaps breathe a bit easier.
      0 Votes

  • KF
    Feb, 2012
    Kevin
    I live in FL I had several investment properties in SC. Those got foreclosed as I was unable to continue paying on them. I tried in vain to get the bank to accept the many short sale offers, renegociate the loan, lower the interest rate, etc. They refused to do anything. They forclosed and at the auction they bought back the properties for less than the short sale offers. I now have a final judgement against me. How does that work with an out of state bank and properties? What happens now?
    0 Votes

    • BA
      Feb, 2012
      Bill
      First, read Florida Collection Laws to learn your basic rights as a Florida resident. Second, consult with a South Carolina lawyer who has experience in real estate law and litigating with mortgage servicers to learn what, if any, anti-deficiency laws apply in your situation. The fact that the servicers shot down short sale offers for amounts greater than the foreclosure sales prices may be significant.
      0 Votes

  • LN
    Dec, 2011
    Leonovich
    We are in the exact situation and a person asking the heloc question. We are in Tennessee and internet search gives me two different answers when I try to find out if TN is a non-recourse state or not. We got a letter from the bank we have a heloc with on the first home that we foreclosed on...now we live in a different home and the bank states they are going to foreclose on it (second home has nothing to do with that heloc- can they?) Would you please be so kind to clarify? Greatly appreciate your advise.
    0 Votes

    • BA
      Dec, 2011
      Bill
      See Tennessee Code Title 21, Ch. 1, Section 803, which discusses foreclosure and its aftermath. As I read the statute, Tennessee does not offer an anti-deficiency law. Readers: If my understanding of Tennessee law is wrong, please correct me below.

      Consult with a Tennessee lawyer who has real property law experience for three reasons.
      1. Learn if my interpretation of Tennessee Code Title 21, Ch. 1, Section 803 is correct or if Tennessee statute contains other sections relevant to mortgage deficiency balances.
      2. The lawyer will review your HELOC and other loan contracts to learn if it has a right of offset. The right of offset would allow it to foreclose on Property B if you default on a loan secured by Property A.
      3. Mortgage servicers make mistakes and foreclose on properties they should not. I am not stating with certainty that is the case here, but it could be. A lawyer experienced in litigation with mortgage servicers is necessary to fight a misguided servicer.

      I realize a lawyer's time is not cheap. However, not consulting with a lawyer for a situation like the one you described would be very expensive indeed.

      0 Votes

  • MS
    May, 2011
    Michelle
    Hi, I own a piece of lot as an investment in NC, and I can no longer afford to pay the monthly payment on this piece of land. On top of that, it has depreciated more than 60%, the bank is in the process of foreclosing it. Can the bank go after my primary home (which is also in NC), my business, and my other property investment (which is in SC). The title for my primary home is both under mine and my husband's home, but the mortgage is under his name only. The investment property in SC is under my name. Please help.
    0 Votes

    • BA
      May, 2011
      Bill
      Reread the original answer above for a brief analysis of the type of situation you described. In general, if a borrower of a secured loan defaults, and the security is sold for less than the balance of the loan, the difference is called a deficiency balance. If the borrower does not pay the lender the deficiency balance, then lender has the right to sue the borrower for a breach of contract. If it succeeds, it will have a judgment against the borrower.

      You mentioned you reside in North Carolina. A judgment-creditor may not garnish the wages of a North Carolina resident, but it may levy a North Carolina resident's bank account, or place a lien on the resident's property. See the Bills.com resource North Carolina Collection Laws to learn more about your rights and liabilities.
      0 Votes

    • RM
      Jul, 2011
      Rose
      Similar problem as above. Please help! Primary residence in FL is property that I can no longer afford mortgage, etc. Secondary home in NJ is owned by me free and clear. If I enter into a short sale on FL property or foreclose, can the lender(s)(1st & 2nd mortgage with same lender) go after my assets (i.e., cash in savings or 2nd property)?
      0 Votes

    • BA
      Jul, 2011
      Bill
      What we call a mortgage consists of two documents. The first is a promissory note that contains a personal promise by the borrower to repay the loan. The second document gives the lender the right to foreclose and possess the security (the property) if the borrower fails to repay the loan as promised.

      Let us say there is a foreclosure that results in a deficiency balance. In other words, the balance of the loan is greater than the sale price of the security. Because of terms usually found in promissory notes, the lender has the right to ask the borrower to pay the deficiency balance. If the borrower refuses to, the lender may file a breach of contract lawsuit against the borrower. Let us say the lender sues and wins a judgment. If the borrower owns real property, the borrower can ask the court to place a lien on the borrower's real property. If the borrower is employed, the lender can ask the court to garnish the borrower's wages (if that remedy is allowed in that state). If the borrower has funds in bank or credit union accounts, it can levy these accounts.

      What remedies are available depends on the borrower's state of residence. Check your state's homestead exemption, wage garnishment, and account levy rules to learn your exemptions.
      0 Votes

  • BA
    Feb, 2010
    Bill
    As I mentioned to reader Samantha above, I believe what you are asking about is called the "right of offset." A right of offset -- in effect -- grants the creditor a private, contractual remedy if the borrower defaults. I would be surprised if such language was in your mortgages. Review your mortgage contracts to see if the mortgage servicer who holds your two mortgages has reserved the right of offset. If you default and the bank forecloses on one property, the bank can sue you for the deficiency judgment if a deficiency is allowed in your state. If it can sue you for the deficiency, and you do not respond, the judge may allow the bank to put a lien on your other property.
    0 Votes

    • MV
      Dec, 2010
      Melissa
      My scenario is similar to the group above. I first bought my condo in Round Lake Beach, IL. We were unable to sell it for enough to cover the outstanding balance of the mort. I then rented the condo for the last 2 years. In that time, I bought a new house in Lincoln, NE with my husband. What would the effect to me and or my husband be if we let the condo go into foreclosure? What would the effect be for a short sale?
      0 Votes

    • 35x35
      Dec, 2010
      Bill
      It is not clear from your question if you are the only one on the condo loan or if both you and your spouse are on the loan. Illinois is a recourse state. That means that the lender can pursue collections for any balance that remains if the property goes into foreclosure. Whomever is on the loan will be subject to collection efforts for the deficiency balance, if the condo goes into foreclosure and sells at auction for less than you owe on the mortgage, should the lender choose to pursue collections. Speak with your lender and see what options they have to offer. To avoid foreclosure, it makes sense to try to negotiate a short sale with the holder of the condo mortgage. In a short sale, the lender can waive its right to collect on a deficiency balance or it can reserve the right to collect it from you.
      0 Votes