Q: Last June I lost my house to foreclosure after a long 12 month battle with a big box lender. My second mortgage on my home was a home equity line of credit (HELOC) with the same big box lender.
According to my credit report, the HELOC was charged off. Recently, I was contacted by the big box lender and they want me to pay $50 a month with no interest towards the amount I owed until I we settle the amount owed.
They told me if I don’t agree to their terms they will turn the file over to an outside collection agency that will lawyer up and garnish my wages.
Is it possible for them to garnish my wages and if I start making payments won’t that reactivate the loan? If it has been charged off, isn’t it closed?
A: There’s a big difference between your responsibility to repay a debt and what is reported to the credit reporting companies.
Your big box lender may have charged off the debt on its books and may have even reported to the credit reporting agencies that the debt has been charged off, but under the eyes of the law – depending on the laws in the state in which the property is located – that debt might still exist.
In some states, when a borrower loses his or her home in foreclosure, the lender can’t go after the borrower for the deficiency. That is to say, when the lender forecloses on a borrower, the lender can only get whatever money is received from the sale of the home through the foreclosure process.
However, not all states prohibit deficiency judgments, though many do. If you live in a state that permits deficiency judgments, the bank can sue you for the deficiency when they foreclose on your home.
Having said that, you should know that some states require lenders to undertake certain actions to obtain a deficiency judgment and recover money from you. Depending on where you live, the lender must file certain documents with the foreclosure documentation to preserve their right to go after you for the deficiency. In other cases, the lender must move to get a deficiency judgment within a certain number of days after the foreclosure.
If you live in a state that does not allow deficiency judgments, you may think you’re “safe.” But don’t get too comfortable. Even states that do not “allow” deficiency judgments will allow them in many cases.
In commercial and investment real estate transactions, you would usually find that lenders can go after borrowers for deficiency judgments. When it comes to second homes, some of those states that don’t allow deficiency judgments will allow them when it comes to second homes. And then in some cases, second mortgages and HELOCs can be carved out of the exclusion relating to deficiency judgments, particularly when a HELOC or second mortgage is obtained after a home was purchased.
During the real estate boom, buyers purchased homes and then refinanced them to strip out the equity, frequently with a first mortgage and a second mortgage or HELOC loan. In some of those cases those second mortgages and HELOC mortgages may not be exempted from the rules relating to deficiency judgments.
You’ll need to find out whether you live in a state that permits deficiency judgments. If your state does not permit deficiency judgments – even on HELOCs – then it’s unlikely that the lender can sue you to recover the amount owed on the HELOC. But that does not mean that the lender can’t still farm that debt out to a debt collector to try to get money out of you.
If your state does allow a deficiency judgment against you on the HELOC loan and the lender has preserved its rights to get that deficiency from you, the lender can move to sue you and recover the deficiency.
You need to find out whether the bank has taken the right steps to obtain a deficiency judgment against you. Double check everything the lender did during the foreclosure. You might find that they blew their opportunity to get their deficiency judgment but are still trying to get it from you.
Talk to a real estate attorney. Once you have a better handle on what rights your lender has in your state you can make a better decision as to how to go forward. Some people might argue that you have a moral obligation to repay your debt to that lender whether the deficiency judgment exists or not, but you’ll need to make that decision yourself after you have a better understanding of where things stand.
Finally, if your situation that led to the loss of your home has left you in a financial strain and you have not recovered from your financial problems, you might need to talk to a bankruptcy attorney to determine whether bankruptcy would be an option for you. The bankruptcy laws were put in place to give people a change to start over. Yes, your credit history and credit score take a real hit. But your credit score and credit history are down near the bottom as a result of the foreclosure.
If the big box lender wants to continue the process of trying to get as much out of you as possible, your solution of last resort might be to file for bankruptcy. In bankruptcy, you might be able to cancel out any debts owed to the big box lender and get a fresh start rebuilding your credit history and your credit score.