Our 2nd Mortgage and equity lines of credit were "written off" by the bank. If we sell, do we owe the money?

Asked by David, Riverside, CA Sat Mar 13, 2010

Second question: Bank has suggested we do a deed-in-lieu. What happens to the seconds/equity lines IF they've been "written off". Property is in Riverside, Ca

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Diane Wheatl…, Agent, Upland, CA
Sat Mar 13, 2010
Yes, I'm afraid you do. Your 2nd mortgage still remains a secured debt and they can come after you one day far, far away when equities are at a level that it would make sense for them to foreclose. Right now, most likely you do not have enough equity to cover the amount of the second mortgage so there is no incentive for them to foreclose.

Now if your first trust deed forecloses before your second then the second is "wiped out". But only "wiped out" in their ability to also hold a trustee sale to reclaim their asset. In that event the second trust deed holder can file a deficiency judgment against you for the amount of the unpaid debt. If you receive a 1099-C that would mean that they are holding you responsible for the unpaid debt and defining it as income to you which you will need to provide to your tax accountant.

There are many exceptions to this scenario that you may qualify for to elude any tax consequences or a deficiency judgment. Bankruptcy is the most common method of preventing a second trust deed holder to pursue you any further as you would include the judgment in your bankruptcy and request the court to strip it off of your total debt. This is possible if you can prove that the value of your home could not repay any portion of the second trust deed if your home were to be sold.

Be careful about the laws of your state as they relate to forgiven debt if you should receive a 1099. Federal tax code prohibits deficiency judgments on a primary residence where the loans are termed purchase money loans. If your loans are refinance loans or your second is a HELOC or line of credit taken out after the purchase of your home it could be termed a recourse loan and subject to tax consequences.

I understand that the state of California stopped providing protection to borrowers with deficiencies and now require them to pay state income tax on cancelled debt beginning January 2009.

There are many details that you must consider when making a decision on which path to take to best protect your financial interests. It is imperative that you consult with a real estate attorney or tax advisor before you make any decisions. Best of luck to you.

Diane Wheatley, Broker
diane @moveupproperties.com
2 votes
Cecilia Rodr…, Agent, Riverside, CA
Sat Mar 13, 2010
Hi David, Whether banks can come after you and will pursue deficiency judgments depends on many factors, including what state the borrower lives in and whether there's a second mortgage or other liens. But if borrowers ignore the possibility of deficiencies, it could haunt them.

State law in California protects you from recourse on your original loan on
“ Non recourse loan “
But, even there, if the original loan was refinanced, some or all of it may be subject to claims.
Second mortgage or lines of credit, you are personally liable from the debt that is a “ recourse - loan “
The cash-out refinance you may have done is also not protected from recourse.
You can negotiate to settle or sign a promissory note . Remember in a Short sale event or a Deed In Lieu of foreclosure the Consequences on 2nd Other liens are the same.

Don’t forget you may have a “ 1099c issued by the lender after a short sale or
foreclosure !!!
You have to contact an attorney or a professional CPA

When you sell your house via Short Sale you need to list your home with a Real Estate Agent with experienced doing Short Sale .
You need to price your house right

You need honest professionals to guide you in the best direction…
I Help homeowners thought every step of the short sale process.
Call me for a no obligation Consultation to see if Short sale is your best option.

Cecilia Rodriguez “ Pre foreclosure Short sale Specialist “
( 951 ) 858-5797 Lic # 01505884
Prudential California Realty
1 vote
Dianne Hicks, Agent, Rancho Bernardo, CA
Sat Mar 13, 2010
Unless you have in writing that they are releasing for any future responsiblity then you can still be on the hook. Why don't you try to short sale it? In the short sale, your agent will try to get the banks to agree not to pursue you for any future payments. That is why you are seeing so many short sales. Because they want released from their obligation and they want to be able to buy again sooner with less of a hit on credit. Still a big hit on credit just not quite as bad.

Good Luck!!!
Web Reference:  http://www.di4homes.com
1 vote
Rudy McDowell, Mortgage Broker Or Lender, Bloomfield Hills, MI
Sat Mar 13, 2010

If I read yours and the response statements correctly, you're in the process of a possible foreclosure. If so, to insure that no one can come after you for the 2nd mortgage, HELOC (equity line of credit) or the remaining debt on the 1st mortgage that may not be settled once the home is short sold, you should also do a Chapter 7 Bankruptcy. The very fact that you're doing a foreclosure means that some adverse event has happened income wise to prevent you from honoring your debt obligations.

If so, you would qualify for a Chapter 7. It will obliterate all your debts (including credit cards) however. Your auto loan (if you have one) as well unless you reaffirm it. Something which the auto lender will allow you to do. You won't be eligible for a new mortgage for another 3 years from the end date of the foreclosure redemption period, but you will free and clear and in a position to restart anew building your credit and life.
1 vote
Richard Alan…, , Riverside County, CA
Sat Mar 13, 2010
That depends on whether the 1st and the 2nd is the same entity. If you can get anyone to write off the debt, do so. However, make sure it is a document that can be notarized and then recorded which puts the matter to rest. If not, you will be hounded by collection agencies until you give in or declare bankruptcy. If the bank will do a deed in lieu of, have an attorney review for you. It has been my expereince that the bank wants you to try and sell the property for at least 90 days before they will do that. An agent can help here at no cost to you. Dont forget cash for keys money and money for moving expenses. You are entitled to both and a good agent can negotiate this for you.
0 votes
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