Information on Bankruptcy on HELOC After Foreclosure

Is there any recourse for my second mortgage lender to come after the funds if I file for bankruptcy after foreclosure?

I have come into a financial hardship with work and have had to take a pay cut. I am 60 days late on my first and second mortgage. I have been in constant communication with both lenders and the first is willing to work with me so I don't lose my home. The second loan is a HELOC and they said they have no programs to assist me. The first loan is $580,000 and the second is $220,000 for a total of $800,000. My home is now worth about $675,000. If I default then the only one who will recover their money is the first lender. The second will wind up with nothing after all the fees and foreclosure costs. Is there any recourse for the second lender to come after the funds if I file for bankruptcy after foreclosure? I would think they would rather settle for a smaller amount instead of possibly losing it all. This would help me as the homeowner and limit most of the loss of their loan if they settle for cents on the dollar. Am I crazy for thinking a lender would settle since it is a second loan?

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Bill's Answer

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By Betsalel Cohen

The HELOC lender has little recourse against you in the situation you describe. If you allow your home to go into foreclosure, and the home equity loan is not paid through the foreclosure sale, the HELOC will become an unsecured obligation. If you took no action after the foreclosure, the home equity lender could pursue collection action against you, including possibly filing a lawsuit against you to obtain a judgment for the balance of the debt. If the creditor obtains a judgment, it may be able to garnish your wages, levy your bank accounts, and place liens on any property you own, depending on your state’s laws regarding the collection of judgments.

For more information about what assets are protected from creditors in your state, see the Bills.com State Statutes of Limitations page. These exemptions also apply to individuals filing for Chapter 7 bankruptcy protection, so you should also carefully review these laws since you are considering filing a bankruptcy petition.

After foreclosure, the remaining unsecured debt owed on your HELOC should be dischargeable in bankruptcy, so filing for bankruptcy should protect you from any collection action taken by your equity lender. However, your ability to file for bankruptcy protection will depend on your income, assets, and numerous other factors which you must carefully consider to determine if bankruptcy is the best solution to your problem. I strongly encourage you to consult with a qualified bankruptcy attorney to help you figure out if bankruptcy is a good choice for you, and if so, which type of bankruptcy you should file. I also invite you to visit the Bills.com Bankruptcy page, where you will find a wealth of educational information about bankruptcy and other options available to people struggling with debt.

Given the fact that you owe so much more on your home than the property is currently worth, you may wish to consider selling the property before you are forced into foreclosure, and including any deficiency balance in your bankruptcy filing. In order to sell the property for less than you owe, your lenders will need to approve a "short sale" of the home, meaning that the lender will allow you to sell the home for less that you actually owe. If your lenders will approve a short sale, you may be able to go ahead and sell the home, and file bankruptcy on any debt remaining after the short sale. It is unfortunate that you are stuck owing so much more money than your home is actually worth, but your bankruptcy attorney may be able to help you work out a plan to sell the property and resolve the remaining debt.

Given the complexity of your situation, and the possible negative consequences that could result from making an incorrect decision, I encourage you to consult with an attorney in your area as soon as possible. You should ask the questions you have posed here to your attorney to obtain a legal opinion of the best course of action available to you. Your attorney may also be able to negotiate with your home equity lender to reach a settlement of your outstanding debt. While the lender has thus far been unwilling to negotiate with you, they may be willing to work with your attorney, as they may see your contacting a bankruptcy attorney as a sign that you are truly in dire financial straits.

For more information about foreclosure, I encourage you to visit the Bills.com Foreclosure page. I hope this information helps you Find. Learn & Save.

Best,

Bill

Bills.com

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Janina,

Des Plaines, IL,

Mar, 2012
Short sale after bankruptcy is a mistake. My “closing” will probably take place soon but if I knew 6 months ago what I know now, I would never involved myself with that MESS. I had FHA mortgage that was discharged in chapter 7 over a year ago but hoping to settle the account with the Condominium Association, to spare my neighbors seeing foreclosure notice on the next door unit and to receive enough money from the PNC bank to cover my relocation expenses, I got involved with so called “short sale” . I bought the one-bedroom unit for $116,000 in 2003, in 2010 when I stopped making mortgage payments the value of the same unit was around $60,000, now the unit is selling at $44,500. In 2010 my outstanding loan balance was about $98,000 and I called PNC requesting the reduction of the home loan principal to match the actual value of my place. I was told that they do not offer that type of the “loan modification option” . They have not received a monthly payment of my home loan since. Here is the “almost final HUD statement” so you can judge for yourself if going through all that hustle for nothing is worth your time.
- Sale price: $44,500
- PNC net proceeds: $36,250
- Realtor commission: $2,670
- Title Insurance Fee: $1,450
- Legal Fee: $750 (I heard this is 50% of what they usually charge)
- Unpaid assessments (I stopped payment the association assessment 10 weeks ago) $818
- Seller Incentive $925
This means that all I am receiving is $925. Since the mortgage loan has been already discharged I am not even interested in any favors from the bank. They cannot collect any money from me even if their sale net proceeds were zero. I am angry, disappointed and actually upset with myself. I was simply stupid. I should have just stay here until the very end, let that “greedy PNC Bank” go through the foreclosure proceedings and maybe sell my unit at the auction for half what they are getting now.

So stay in your house or condominium as long as you can, save your money and let the sheriff kiss you goodbye. You credit is already very bad and it cannot really get any worse no matter how nice as a human being you are. Do not let others make money on your misery, specially that bank that was never good to you anyway. After all, the bank is not losing anything, do not fall into any “short sale” promises, and represent only your own interest. Good luck and be smarter than I was! Janina
KG

Krissie,

Champaign, IL,

Dec, 2011

My husband and I bought our condo in Chicago at its peak, for 223K. We currently owe 187K on the first with Chase and 44k on the 2nd with Chase. The condo market has dropped and our home is valued at around 65K. We've had it up for short sale for about 11 months now and have only gotten 2 offers. One for $55K that Chase already turned down and another current offer at $43k. We are no longer living in the condo because we had to move for our jobs and own the home (have a mortgage on) we are currently in. Questions: trying to decide on bankruptcy but here are the factors -we both make more than the IL gross income of $66k a year and have no credit card debt....only the 2 homes, 1 vehicle, student loan and a personal loan. 1. Would it make sense to take a 6 month leave of absence from work to reduce our income to just under the 66k gross and then file for bankruptcy after that? 2. If the short sale is completed, is it best to file immediately after once a payback loan amount has been settled for the 2nd? 3.Could I have a lien put on my current home and if so should I consider selling the current home and just renting? On paper we make too much money but my 18 month son was just diagnosed with a chronic disease and the majority of my money and time is spent on copays, meds and care for him which would make it difficult for us to pay back whatever loan the 2nd settles on. Thanks for your help, I don't know what to do.
- BA
  
  Bill,
  
  Dec, 2011
  You must address a few issues, as follows:
  1. Deficiency balance
  2. Covering everyday costs
  3. Protecting your assets
  Deficiency balance: You will be liable for a deficiency balance on both your first and second mortgages, unless you negotiate a settlement, before selling the property. If you proceed with a short sale, make sure that your first mortgage lender, will include an anti-deficiency clause in your agreement. Remember, forgiveness of the debt, may create a tax liability.
  
  Cash Flow: You suggested that stopping work for 6 months may help you in a bankruptcy procedure. If you are contemplating filing for bankruptcy, I strongly recommend that you speak with a bankruptcy lawyer to see if your strategy could possibly succeed. However, it seems to me that by not working you will create a tremendous burden on yourself, and probably create more debt and would have problems meeting your other obligations. If you are left with debt, upon selling the house, then review your debt relief options. It might be wiser to reach a settlement with the creditors.
  
  Protecting your assets: If you default on a loan, then the creditor will seek a court judgment that can lead to a lien on your current house. That does not mean that you will be forced to sell the house. If you have equity in the house, then you will want to consider how best to use it to cover your debts, and manage your daily budget.
MF

Marc,

Dec, 2011

My chapter 7 was discharged in February 09. About 8 months ago I noticed my mortgage was not reaffirmed, I thought it was and I have been making the monthly payments. Either way it is showing up on my credit as under the bankruptcy. If I stop making payments on it how will it affect my credit report, as of now my credit is very good now that the bankruptcy is past two years, I know I will not be held liable but am still wondering about my credit report. Thanks for the help
- BA
  
  Bill,
  
  Dec, 2011
  
  I recommend that you read Bills.com page about reaffirming a mortgage. It sounds as if you chose to retain the property and maintain the payments. If you intend to continue to make the payments, then your credit report will reflect those payments. If you stop making those payments, then your credit report will be negatively impacted.
  
  If you did not reaffirm the mortgage, then, as you stated, you should have no personal liability on the loan. It concerns me that you thought that your mortgage loan was reaffirmed but now you feel that it was not. Check with your bankruptcy lawyer, to find out what your exact position is regarding the reaffirmation of your mortgage loan.
RS

rosita,

Crofton, MD,

Oct, 2011

Financial hardship has made it difficult to afford home; for nearly a year now I have requested several remediies/assistance from my lender - SPS mtg has denied 2 loan modification requests; short sale and as of last month a deed in lieu of becuase the 2nd mtg company (GMAC) would not accept the $4,000 offer from SPS (GMAC wanted $8K). Last week I was told by SPS that they would consider me for their keys for cash program then I received a notice that they have denied that as well because the "forclosure date has been cancelled". I am so frustrated and don't know what to do at this point. I have recently moved out of the house and am renting an apartment. I have 2 questions: 1)what if anything do I do know, just sit an wait on SPS to foreclose or is there something else I should be doing...I don't want/cant afford the home but I am lost? 2)I live in MD, what happens upon foreclosure, can/will both lenders come after me for money and if so should I consider bankruptcy now before they come or afterwards? Thank you, this is such an awesome sight for folks like me that are clueless.
- BA
  
  Bill,
  
  Oct, 2011
  
  Questions like these are difficult or impossible for outsiders like me to answer because I have no insights into what your mortgage servicer has planned. Based on the behavior you described, it appears even it does not know what its priorities may be. You lost some leverage when you quit the property, and if the servicer realizes you no longer reside in the property it may not offer you a cash for keys contract.
  
  Maryland does not protect its residents with a anti-deficiency law.
CC

Chris,

Fanwood Borough, NJ,

Oct, 2011

I was divorced 2 years ago leaving my house with my wife and two kids. I got an apartment and paid rent for a year before moving into my new girlfriend's apartment. Within the 2 years my ex wife stayed at my old house without paying a dime towards the mortgage while collecting child support at the same time. My $275,000 house has now gone through the foreclosure proceedings and the bank now owns it. Our second mortgage of $40,000 was also wiped off our account at the moment. I have two more years of car payments equaling $7000 and my credit card is now $11300. I pay all my bills on time with the exception of my mortgage. I've already seen first hand what interest rates the banks are offering me if I decide to trade in or buy another car. Since my credit is shot for the next 4-7 years, would it be wise to file for bankruptcy at this point?
- BA
  
  Bill,
  
  Oct, 2011
  
  In my opinion, no. I hasten to recommend you consult with a bankruptcy lawyer immediately who can look at your facts and situation in more depth.
  
  Why not now? Because you do not know how aggressive the first and second mortgagees will pursue you for what I assume is the deficiency balance on your property. If the mortgagees plan to cancel or forgive the deficiencies, then the bankruptcy would be pointless, with the exception of the credit card debt.

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