I’m often asked to advise clients about the effects of a foreclosure on their financial future. In this post I will discuss the dangers of the Home Equity Line of Credit (HELOC) or second mortgage after foreclosure.
If you have a second mortgage or HELOC then the foreclosure will not reduce or eliminate the debt, except in the unlikely event that the home sells for more than the original mortgage debt. This means that the creditor will retain the right to collect their debt. In Utah the statute of limitations to file a lawsuit to collect this type of debt is 6 years. That is a long time for the debt to hover over your head. That means that you may not even hear from the mortgage company until after the foreclosure is a distant memory.
I had a client who lost her home as the result of her divorce. After the divorce and foreclosure my client had fully moved on with her life, at least she thought she had. Instead, five years later she was sued by the bank (as a joint defendant with her now broke ex-husband) to recover the HELOC. Unfortuantely, this was perfectly legal and she didn’t have any real defenses.
We eventually negotiated a settlement with the lender, but this could have been resolved for a small fraction of the cost if she had resolved the problem by filing a bankruptcy around the time of the foreclosure. Also, with a bankruptcy the debt would have immediately stopped showing as an outstanding obligation on her credit report and by then her credit would have likely been very good. Instead, her credit report now showed that she had recently been sued for failing to pay a debt, eventually showed that the debt was satisfied for less than full value, and she was also required to pay taxes on the amount of the forgiven debt. What a mess!
The moral of the story is don’t assume that debts will just go away on their own. Your second mortgage or HELOC won’t. If your home has been foreclosed or is about to be foreclosed and you have a second mortgage or HELOC call my office and we will see if we can help.