Good Luck and if we can be of any assistance please do not hesitate to ask.
The answers provided are good ones. I just want to add that when the lender has the legal right to debt and their legal right is placed against the collateral in this case a property and they are "wiped" out at foreclosure auction. The lender would then remove their interest in the property and go after the borrower in order to collect. That debt is actually a commodity that can be sold. The creditor will attempt to collect from the party that owes the money and if they are unable to collect, the creditor will attempt to obtain a deficiency judgment and then that commodity is more valuable because a lien can be placed on the borrower's other property, garnish wages, etc. This is why bankruptcy is so common with foreclosure.
Now, the good news, if you or a friend owe money to a second lien holder, you can easily settle that debt for a lot less than is owed. Typically these folks will settle for 20% of the total debt owed or less. Make sure that you get the correct paperwork from the creditor. For example, you owe us $10k for the debt and we are settling this amount in full for $2k.
The Credit Repair Expert
Before things progress further take the best step and talk with a tax attorney or tax accoutant....a professional. Waiting just gives you more time to worry. They will give you guidance about what you should do and then ....do it. In a few years you will want to buy a home and if you straighten things out now....then later you will be able to proceed without having to deal with past nightmares. No fun right now but later it gets worse. I can recommend some people if you would like. It is important you work with people you trust and follow their advice. Ask them questions they won't mind, but follow through. Call me if you'd like. Good Luck, Kathleen (281) 799-4002
Generally all subordinate liens are "wiped out" by the foreclosure of a 1st lien holder (IRS liens are not subordinate liens); However, BOTH the 1st and 2nd lien holders may very well be entitled to ask the courts to grant a deficiency judgment against you in their favor. That is, if the foreclosure sale (auction) of the property did not produce enough funds to pay off your debt entirely (all principal balances + past due interest, late fees, attorneys' fees, etc), a judgment can be placed againt you. That's right, you'll still owe it and the debt will follow you until it is paid or settled by you or your heirs --Not a pretty picture and I'm afraid it gets even uglier.
Additionally, the IRS may decide that all amounts paid to you (the loans & associated debts) and not paid back by you, is now good ol' taxable income. In their narrow sight, you've just made money! Sadly, at a time when you may feel the poorest and have lost your home, the IRS just may want you to pay income taxes on that debt. My best advice is to seek professional help from a qualified tax accountant and/or attorney. Sooner is better. Best of luck to you!-- Real Estate Brenda