Can Foreclosure On One Property Affect Another We Own?

Bills.com > Manage Debt > Deal with Debt > Debt Relief Q&A > Can Foreclosure On One Property Affect Another We Own?
READER QUESTION

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

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Bills.com Resident Expert
Dec 16, 2011
HIGHLIGHTS
  • Foreclosure laws and anti-deficiency rules vary by state.
  • There is usually no link between an owner's two properties.
BILL'S ANSWER

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.

To learn more about foreclosure and the options available to homeowners, I encourage you to visit the Bills.com foreclosure resources page.

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.

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

Comments (14)


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Leonovich N.
December 15, 2011
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.
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Bills.com
December 16, 2011
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 woule be very expensive indeed.

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Michelle S.
Cary, NC  |  May 25, 2011
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.
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Bills.com
May 25, 2011
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.
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Rose M.
Millstone Twp, NJ  |  July 27, 2011
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)?
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Bills.com
July 27, 2011
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.
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Bills.com
February 21, 2010
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.
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Melissa V.
Lincoln, NE  |  December 08, 2010
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?
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Bills.com
San Mateo, CA  |  December 08, 2010
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.
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Susan .
February 21, 2010
If you have two homes (both financed by the same bank) (one rental) and have to sell that one b/c you can't afford it anymore....can the bank force you out of your primary residence (which would not sell for it's value either)??
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Bills.com
February 08, 2010
In comparison to California's anti-deficiency law, Nevada's law is quite limited in scope and protection of consumers who default on their mortgages. According to Nevada Lawyer, a publication of the Nevada State bar, "Under NRS 40.457 (the 'deficiency statute'), a court may not award the creditor a deficiency judgment following the trustee's sale until there has been a hearing to determine the 'fair market value' of the real property on the date of the trustee's sale. In no event may a creditor obtain a deficiency judgment against the debtor for a sum that exceeds the difference between the indebtedness and the fair market value of the real property on the date of the trustee's sale." Therefore, under Nevada law, the creditor may exercise a right to obtain a deficiency judgment, but the window for doing so is narrow. Regarding your final question, what you are asking 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 they did. Review your mortgage contract to see if the mortgage servicer who holds your two mortgages has reserved the right of offset.
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Samantha S.
February 07, 2010
WE LIVE IN NEVADA. I HEARD THAT FOR THE NEW LAW, THE BANK CANT GO AFTER YOU FOR THE DEFICIENCY JUDGMENT. WELL, MY PRIMARY HOUSE WILL GO SOON IN FORECLOSURE. BOUGHT IT IN 2004. LATER WE REFINANCED IT WITH CASH OUT WHICH WE USED FOR IMPROVEMENTS, POOL, ETC. THE NEW LOAN WAS INTEREST ONLY, 30 YEAR. AFTER MY HUSBAND ACCIDENT IN 2008 EVERYTHING WENT DOWN THE HILL. WE HAVE A 2ND SMALLER HOUSE, THAT WAS OUR PRIMARY HOUSE BEFORE 2004. WHEN WE MOVED TO A "NEW" HOUSE, WE RENTED, UNTIL 3 MONTH AGO. NOW WE WILL BE MOVING TO THAT HOUSE. THE LOAN IN THIS ONE ES FIXED, 30 YEARS, WE KEEP UP WITH THE PAYMENTS. NO PROBLEMS. NOW WE FOUND OUT THE LENDER OF OUR HOME, THAT IS, THE ONE THAT WILL GO IN FORECLOSURE IS THE SAME THAT THE OTHER SMALLER HOUSE. I WONDER IF THEY CAN PUT A LIEN IN THIS OTHER PROPERTY. WE ARE DESPERATELY, PLEASE ADVISE, SUE
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Bills.com
December 03, 2009
First, suggest to your friend that they consider a short-sale or deed in lieu of foreclosure before defaulting on the Florida mortgage and allowing a foreclosure. Second, Florida does not have an antideficiency law for mortgages, therefore the creditor can pursue the debtor for the deficiency balance. See Collections Advice for more information about the rights of creditors and debtors when collecting an unsecured debt.
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Meena .
December 02, 2009
my friend has a home in florida in her and her husband name but loan is on her husband name. they cannot afford the mortgage and want to let it go in foreclosure.Thay also have a primary residence in california which is in my friend name and loan is also in her name.Can the bank go after the assets of their home in california even though her husband name is not there.
Thanks for your feedback!
 
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