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?
By
Mark Cappel
Published: Feb 7, 2008
- 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
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79 Comments
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.
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.
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.