Equity Line of Credit and Foreclosure
September 30th, 2008 by Jarad S.
Question: I live in California; if my home goes to forclosure and I have a an equity line of credit, will the line of credit, $150,000 also be wiped out? The line of credit is secured by the property.
Answer: Yes, if the line of credit is secured by the property in foreclosure. Most homeowners have a home equity line of credit that takes a 2nd lien position on their home. If the home is foreclosed on by the 1st lien holder and no one bids at the auction, the 2nd is wiped out, and the bank has the option of issuing a 1099 to the homeowner or filing a deficiency judgment against them. In most deed states, including California, it’s very uncommon for the lender to file a deficiency judgment. If you know what you are doing, there are things you can do to prevent a deficiency judgment altogether so it’s never an issue.
November 10th, 2008 at 5:06 pm
Question If this is true, why did I just get a letter from my lender stating that they want payment in full in 10 days or they will come after me to recover the money from the line or credit and I will have to pay their and my attorney fees? I am in the same situation as the person who posted the original questions. I live in CA and my home is in foreclosure and I have a 260k line of credit secured by the property. My 1st mortgage and the line of credit are with Washington mutual. Was legislation passed recently to protect homeowners from lenders being able to come after them on equity lines?
I look forward your response.
Thank you
November 15th, 2008 at 3:52 pm
Answer: If the first lien holder forecloses on the property and no one else bids or the 2nd doesn’t protect their position by bidding, then all junior lien holders are wiped out. However, just because they are wiped out doesn’t mean they go away. They have 3 options at this point. They can do nothing, they can 1099 you for the loss, or they can file a deficiency judgment against you and request you pay them the amount they lost. It doesn’t matter what state you live in, all lenders can file a judgment against you if they want. Typically they do so more in mortgage states. Depending on the size of your 2nd mortgage, most homeowners are forced to file bankruptcy to eliminate the judgment if the lender decides to sue them. But more than likely you have nothing to worry about. Especially California. California is one of those states where it’s extremely rare they file judgments. I’ve even heard they can’t, but I don’t think that’s completely true.
January 8th, 2009 at 2:35 pm
I live in california, I am living in my mothers house and was paying her mortgage..She does not live here..Recently the intrest rate has gone up every 3-4 months…bad loan on my mothers house…I took a line of equity out on the house 100,000.00 in order to help with repairing it in order to make it liveable..the house was in bad shape…Now I am getting transfered and am not able to pay the mortgage anymore….My mother has since got a new house and will be unable to pay it either…My question is if she short sales it or forcloses on it will the line of equity be washed….both loans are through the same lender just in different names….Help!!!
January 11th, 2009 at 5:41 pm
If she tries to do a short sale on the property, the investor or buyer will discount the 2nd mortgage, pay off the loan and she will avoid a foreclosure on her credit. If the home is foreclosed on, the same thing will happen, but now she will have a foreclosure on her credit. In both cases, the lender may file a deficiency judgment against her for the 100,000 loss or they will 1099 her for the 100,000. Since 1099 is better than a deficiency judgment, a good short sale investor knows how to ask for the 1099 so you don’t have to worry about coming up with $100k. And once she is 1099, a good accountant may be able to help counteract that income with a particular form the IRS uses. So a short sale, by far, is the best way to go and yes in both cases, the lines of credit are either wiped out or paid off.
January 12th, 2009 at 10:09 am
We owned a property in Virginia that we foreclosed. We had a line of creadit attached to the property. Are we liable to pay the line of credit? We have been receiving notices from the insurance company, and the mortgage company stating we owe the balance of the HELOC.
January 15th, 2009 at 3:56 pm
J Drone: Yes, you are always responsible to pay back the loans. However, if you don’t pay them back, they will either 1099 you and count the loss as income to you or they will file a judgment against you for the amount they lost. Most often it’s the 1099.
March 31st, 2009 at 2:29 pm
Is it true that if you foreclose on the a home equity line first and they are paid off the bank can’t come after you for the first??
April 2nd, 2009 at 1:25 pm
If the bank is “paid in full” they can’t come after you because the loan is “paid in full”. If any loans are not satisfied or paid in full, they can try to collect the debt that is owed to them.
November 2nd, 2009 at 12:47 am
I have been laid off and have a first and 2nd (equity line of credit for 250K). With unemployment, i am able to cover the first, however, not the 2nd (wamu), can they foreclose on my house? since I am uanble to pay, what could happen? when I signed up for it they told me it was like a credit card. Please help!
November 2nd, 2009 at 11:34 pm
Yes, wamu can foreclose, but since they are in 2nd position it may take them awhile to do so, especially if your home is not worth what it use to be. You may want to see if can modify the loan by asking wamu to lower the interest rate temporarily until your financial situation changes.
November 10th, 2009 at 11:35 pm
Hello! I read the previous posts and they are great information. My question to you is what happens if you do get 1099??. I lost my home and now Bank of America bought up Countrywide and shows a HELOC that i owe them for 170k. from what i read it seems i should just let it ride?? i don’t understand. Please assist, Thank You
November 11th, 2009 at 11:12 am
Depending on where you live, if you already lost your home to foreclosure you may still have a redemption period or waiting period in which you can redeem the property. Once the redemption period is over, the bank will decide to do one of three things. They will either do nothing (unfortunately we all wish this would happen but never does) or they will 1099 you for the difference and count it as income to you. So if they wrote off 170k, then you will have to pay taxes on 170k. Depending on your tax bracket or how many write offs you have, it could be anywhere from 10% up to 30%…Ouch! The IRS does provide a form that allows you to negate the whole amount if you qualify. I would talk to your accountant and see if you qualify to use form 982. The last thing they can do is file or sue for deficiency. Meaning they come after you for the full amount. When this happens most homeowners have no choice but to file bankruptcy which will get rid of it once and for all. Now depending on your states foreclosure procedures, your bank may be more or less inclined to choose one of these options over another.
December 10th, 2009 at 11:38 am
I am considering foreclosure, I put down 103K down on my home with a purchase price of 326K, todays market value is 165K…thank you wall street, if i do get 1099′d by the bank after forclosure can’t I write off the loss of my down payment to negate this 1099? Also 5 months ago i took out my equity line of 80K and deposited in a relatives bank account how long should i wait to go into foreclosure so it does not appear as fraud.? Michigan resident
December 10th, 2009 at 12:32 pm
Brian,
You should be able to write off the loss over time…talk to your accountant on that. Also if the bank does 1099 you, because it was your personal residence, you may be able to negate that anyway. Again talk to your accountant. What you don’t want to happen is for the bank to file a judgment against you for the 80k. So you may have to work out a settlement with them to satisfy that loan or take the risk of a judgment being filed.
January 2nd, 2010 at 1:04 pm
So I am looking at buying my grandparents house in Florida. They owe $50,000 on there mortgage and took out a line of credit ($150,000) through a different bank. Can I buy the first mortgage and get the house or will the line of credit not allow it to be sold (will they allow it and go after my grandparents)? My grandparents are already preparing to file for bankruptcy.
January 3rd, 2010 at 11:51 pm
Mike,
Depending on what the property is worth, you’d be better off trying to negotiate some pay off or short sale with the 2nd. More than likely they will come after your Grandparents with a judgment which is sounds like will force them into bankruptcy. If you can negotiate with the 2nd some sort of payoff for 5%- 10% of the loan, it would save your Grandparents the headache of foreclosure and bankruptcy on their credit. Then if they are 1099′d you should be able to get that negated as well.
January 4th, 2010 at 6:51 pm
I live in New York and have a 1st mortgage at Wells Fargo that has recently been approved for modification and a home equity line of credit from Bank of America that is currently in default. the payments have not been made in over a year and i recieved a letter from their attorney stating that they were going to foreclose on my property if i did not bring the back payments up to date. they wanted a lumpsum to bring the account within 6mths of delinquency. needless to say i did not have the lumpsum and still dont since each month they have been tacking on more and more fees bringing the amount further and further out of reach.
I recently contacted my first mortgage bank and requested my modification closing docs and they asked if i was selling my home since there was a request for a “payoff letter” on my home. I found out the it was Bank of America attorneys that was requesting the payoff.
Question: can BoA foreclose? (The property was appraised recently for more than whats owed on the first and second). Also why did their attorney request a payoff letter? are they getting ready to send me foreclosure papers? Are they able to force the first into foreclosing as well?
January 5th, 2010 at 12:05 am
Melanie,
The 2nd can foreclose on your home. It sounds like you are making payments or at least some payments to the first which is why they are not initiating foreclosure. Bank of America probably requested a payoff letter so they know how much you owe so they can begin the foreclosure process themselves. One option is to work out a modification or even a pay off with them if you want to keep your property. See if you can get them to accept less than what is owed on the property. What ever you do, you need to deal with the 2nd because they can and will foreclose.
January 5th, 2010 at 12:17 am
“Hello I live in California and I have a 1st and 2nd mortgage on my home with wells fargo I, also have a heloc with etrade bank I am on a foreberance with my 1st and 2nd lender that they just gave me but, my heloc they are auctioning my house they claim they have 1st position and will sale lmy house on the 7th of January I, contacted my primary lender and they told me that they are in 3rd place but, the heloc lender say’s they are in 1st place because there deed was recorded 1st by several months can my heloc take my house and since what I was told my primary lender who I have the 1st and 2nd with they tell me they have to go through them and pay them off first but, for me to keep my agreement with them what am I to do I, am scared please advise
January 5th, 2010 at 11:20 am
Sharon,
You need to pull a title report and find out who is in first position. Regardless if your HELOC says they are in first position or third position, they can foreclose on your home. However, if the title report shows they are in third position, they may be more inclined to postpone the auction because they will realize they won’t be getting a dime and have an negative asset on hand. They may be more willing to work out some sort of deal with you, maybe even a long term pay off plan. If the title report does show your HELOC in first position (which does not make sense at all) then they would be more inclined to foreclose because everyone else gets wiped out and their may be a possibility of a buyer. It would be important to find out for sure because knowing which bank has seniority would give you leverage to negotiate something with the junior lien holders.
January 18th, 2010 at 10:04 am
I live in New Jersey, and I have a first mortgage with Coldwell Banker and a HELOC with Wells Fargo. I am behind on the first mortgage and facing foreclosure on 250,000. My house would probably sell for 200-225K. My HELOC is for 60,000. I am current with them, but I want to know what would happen to the HELOC. Would I continue paying what I am paying now, would it increase dramatically or would they require a payoff? Thanks.
January 19th, 2010 at 11:16 pm
Well, more than likely it will be wiped out at the foreclosure auction. Although it gets wiped it, you are still responsible to pay the debt. You can continue to make payments to them until the debt is paid off or you can make arrangements to pay them a certain amount each month. But most homeowners work out some sort of payoff or settlement with the second for a fraction of the loan amount. This is usually obtained through a short sale transaction. If a short sale is not accepted and the second is wiped out, they will either 1099 you for the amount they lost or they will file a judgment against you in which you would be responsible to pay the full amount back. Most people in this situation have to file bankruptcy because they are not able to pay the debt back. So if you plan on letting the house go, you might as well try everything you can to avoid a judgment against you. You need to do all you can to get a short sale approved and negotiate a payoff with the first and second.
January 21st, 2010 at 10:18 pm
What are my chances of settling a HELOC with etrade?
January 22nd, 2010 at 11:25 pm
I would say your chances are very good right now. All lenders in 2nd position are very motivated right now to settle debts because home values have dipped so much and there is no equity in the property anymore…so they would rather have some money now rather than go through the expensive process of foreclosure and end up with nothing.
January 25th, 2010 at 11:01 am
I brought my second home in 2008, paid my mortgage for my primary as well as my secound home. I moved out of my first home into my secound in 2009 and tried renting my secound home but never was able to I tried selling it but ended up getting it forclosed wil I be sent a 1099a or 1099c? I live in ca
January 25th, 2010 at 3:43 pm
Also live in California. We bought a house in 2004 for $470K. We put %5 down, 1st was 80% of purchase price and the remaining 15% was in the form of a HELOC. We never touched the HELOC for anything after the purchase. The bank foreclosed and the property just sold at auction a week ago for $315K. Is the HELOC wiped out even though the bank did not even get enough to cover the 1st?
February 18th, 2010 at 1:08 pm
I have a home in Florida that is about to be foreclosed. 1st mortgage is with Chase $138,000 second was with WaMu which is now Chase $22,000 3rd is with previous owner $17,000. I had a cash buyer for a short sale but was declined because the previous owner would not sign off on it because they were not going to get anything. My question is what is going to happen to the second and third loans or more importantly to me. What time line am I looking at and is there anything I can do to prevent any bad stuff happening to me.
Thank you
March 2nd, 2010 at 3:28 pm
I’m trying to purchase a short sale with three liens. A first at 600,000, a second at 80,000 and a third HELOC at 117. The bank holding the first two loans accepted the offer, which is coincidently exactly what the house appraised for. The first and second have been zero’d out and forgiven. The bank holding the third in line HELOC, which I’m not giving the name of (although I should because they’re very inconsiderate) are holding the short sale hostage even though they are getting ten percent of the HELOC balance. We have offered 10,000,in addition to what the first bank is passing through (5,000). I thought they would rather finish a short sale than go into foreclosure. Nothing makes sense. Recently we offered them 15,000 on top of what the first bank is passing thru, bringing it 5,000 beyond what the house is appraising for, which means it’s not in the loan it’s out of my pocket. The retailer informed me the bank negotiator said if we give the bank 22,000 they’ll sign off today on the loan, otherwise, we’ll just have to wait. This is almost extortion, because it brings the price well over the appraisal. Is this all legal?
March 3rd, 2010 at 10:29 am
Gabrielle, these days a lot of things don’t make any sense. Here you are offering a lender, in 3rd position might I add, some money to satisfy a loan and they know full well that if it goes to foreclosure, they will get nothing…it makes no sense unless they feel very strongly that they will get MORE money when it forecloses. But it’s a little unrealistic these days. You have a couple options, one of which I don’t really encourage, unless there is no other option. That would be to tell the lender you just want them to release the lien so they can pursue the homeowner for the difference. See if they satisfy the loan, they give up that right…they can only 1099 the homeowner. When they release the lien the homeowner gets the short end of the stick if they decide to sue. However, if it forecloses, the 3rd can pursue them anyway and sue the homeowner for the deficient amount, so in this case you might try that if all else fails. The other option is to see if the agent will throw in some of his/her commission…how bad do they want to close this deal? I don’t know how close the auction is, but sometimes time plays an important role in creating urgency with lenders.
March 8th, 2010 at 3:50 pm
Can someone help? I just found that my lender foreclosed my condo and is now billing me for the line equity of $48,000. Is this normal? Also, i’m still getting property tax notices and HOA bills.
March 8th, 2010 at 3:52 pm
Oh, and i’m also from California. Thanks.
March 9th, 2010 at 10:49 pm
It depends on the lender…some will 1099 the homeowner, others will file a judgment. It’s normal to receive one of these. You will keep getting property tax notices until the county updates their records and you are no longer the owner on record.
March 11th, 2010 at 2:06 am
Hello Jarad!
I live in CA..my investment home is going into forclosure but hasn’t been sold yet. We took out an equity line of 125,000. The equity line bank (wells fargo) charge-off the account. Can they sue us? and if they do…do we have to repay the equity? They also withdrew money out from my checking accountfrom wells fargo…is that legal? Can they withdraw money from my other banks or even my wages? Please help!!
March 16th, 2010 at 10:59 pm
I live in Arizona. My home was foreclosed by the 1st lien holder and went to auction. There was no outside bidder and the lender, Fannie Mae ended up with our home. We fought to get the home back and a relative purchased it from Fannie Mae and this relative is letting us pay them back. The agreement is to put our home in the name of our relative. BUT, We just got the quit cliam deed from Fannie Mae and it has our name on it. The problem is that we have a HELOC that was a line used to pay off debt (such as our automobiles). We have been paying our HELOC and have not had any communication either way about the foreclosure that took place. Do we have to record the quit claim in our name before we put it in our relatives name? When we do so will the HELOC automatically be re-attached? Is there any chance that this relative would have to pay off the HELOC before we could quit claim the property to our relative? Is there any way of quit claiming directly to the relative without putting it in our name first, even though my name is on the quit claim that hasn’t been recorded yet?
March 30th, 2010 at 5:06 pm
Hi Jarad,
I live in California, we have a home that has an equity loan of about 20K. Both the mortgage and the equity loan were taken from Wamu now Chase. We are in the process of short selling the home, however the equity loan division approved the short sale but says they may pursue us for the amount we owe. So is it a better option if we foreclose instead? If the equity loan division forecloses our home, does this mean the mortgage division can pursue us for the money we owe? I had heard that if it is the same bank then neither can pursue us; however the two divisions say they are not the same thing. Could this be possible? We are trying to figure out whether short sale or foreclosure is a better option in terms of freeing from debt.
March 31st, 2010 at 6:28 am
Sorry, I meant 200K, not 20. Thanks in advance for your help here.
May 13th, 2010 at 10:37 pm
Hi, so i co-own a condo in N.C. the co-owner has taken out a home equity loan in her name only which i signed off on. she has stopped making payments to either loan. i have been advised to short sale the property but am wondering if it will effect my credit since the short sale will essentially be on her equity loan. please advise…
July 6th, 2010 at 11:35 pm
Hi Jarad,
Sorry to bother you, but as I’m only a recent law school graduate, I have no idea where to start in helping my parents out. It would be awesome if I could get your two cents on our situation and what steps would be good to take. I only found out about my parents’ situation after moving back home to study for the Bar. And now I feel like I’m such an awful son.
Up until October 2008, my parents were well off and able to make timely payments on their $350K~ home mortgage (w/ WAMU – now Chase), $200K line of credit w/ CitiBank and $200K line of credit with Bank of America. However, due to bad investments and actual fraud by a now dissolved company, my parents lost everything and haven’t been able to make any payments since October 2008. Somehow, my parents have been able to continually push off the foreclosure sale dates because of some sort of litigation action against Chase concerning illegal interest charges over the past couple of years. It was a plan suggested by my an attorney that my parents hired. In any case, that action ended in favor for Chase. Currently, my parents are in the loan modification process with Chase.
However, I’m wondering if there’s anything else that I could do. Because we literally have no other assets or money, we are penniless and broke. Do you think Chase, Bank of America and CitiBank would be willing to negotiate with me in forgiving a good majority of my parents’ debt obligations, perhaps even up to 90%? Otherwise, if my parents did choose to file for bankruptcy, these lenders wouldn’t be able to get anything from my parents. What do you think? Do I need to be a lawyer to do this? Also, if I were to do this, would I make a visit to the local branches of the lenders? Call the respective divisions? Or write letters?
Sorry for the long inquiry. I’ve just never done this kind of work before and I really would like to help out my parents.
Thanks Jarad. I hope to hear from you then.
July 8th, 2010 at 11:21 am
It’s unfortunate… I hear about these cases almost everyday about bad investments, scams, fraud, you name it. And it’s sad this happens to good people. Yes there is always something you can do, whether or not the lenders cooperate is really up to them. You can try to negotiate with the 2 lenders who have the line’s of credit and see if they would be willing to accept a payoff. However, even if they were to accept a payoff of wiping out 90% of the loan balance, you would need to still come up with $40K. From what I understand you don’t have that. At this point, you might want to talk to your parents accountant or bankruptcy attorney. Sometimes the best option is to start over and that’s what bankruptcy is for.
July 14th, 2010 at 1:14 pm
My property is in Iowa and I have the same question. My first is with Wells and the HELOC is with US Bank. If Wells forecloses does US Bank either 1099 or file a judgement? Do they usually 1099? We have a short sale offer but US Bank wants me to agree to pay for the deficiency that I cannot.
Thanks
July 28th, 2010 at 11:12 am
Yes they will either 1099 or file a judgment. They almost always 1099. Of course US Bank wants you to pay the deficient amount… that doesn’t mean you have the ability to pay it. See if they will settle for something A LOT less. I’m talking pennies on the dollar. If you are deficient $50K, offer to pay them $3 -$5K. If you don’t have it, then there is not much you can do. More than likely they will just 1099 you anyway.
August 31st, 2010 at 5:08 pm
My condo (in California) foreclosed last December and I received a 1099 from my bank which I was able to write off on my taxes. I have an existing HELOC with Chase of $36K which was tied to the condo, and now they are asking for their money. Do I have to pay it back? Other than filing for bankruptcy is there another way around it?
August 31st, 2010 at 6:08 pm
Yes, you can settle with them. Tell them you’ll pay them $2000 to satisfy the debt. Usually they will even arrange a payoff over several months if you can’t afford a lump sum. Try to work with them as best as you can.
September 2nd, 2010 at 12:59 pm
Thank you for the advice. Should I work with the recovery department, or would you suggest I try another? The recovery department can be a pain since they are getting commission off of the debt.