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Joanne Fraser, Real Estate Pro in Los Altos, CA

In California does a HELOC get wiped out if the seller files bankruptcy in a short sale?

Asked by Joanne Fraser, Los Altos, CA Tue Apr 21, 2009

Reducing the list price puts us in short sale territory with the HELOC (Wells Fargo) can the seller get off the hook by filing bankrupcy?

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I would not get involved with advising a client or pursuing them in any way to file for a BK especially with the sensitivity of the legal aspects. I would advise them to contact an bk attorney for that question and a CPA for tax repercussions even if i know the answer i would have them sign a disclosure saying as such. With Attorneys preying on short sale sellers it is always best to cover yourself in this circumstance. That being said why not negotiate the short sale on the second. It is always a better situation when only having to have to negotiate a second far less hurdles to jump, when they are used to receiving almost nothing from the firsts.
0 votes Thank Flag Link Mon Jun 15, 2009
If the short sale has been completed, the HELOC had to sign off to release the property. They often go after the seller for the difference, or make them sign a personal note for the unpaid balance.

When someone declares bankruptcy, the court decides which creditors get how much. I don't know bankruptcy law, but do know there are differences between total liquidation and reorganization. Your client needs to talk to a lawyer to be sure.
0 votes Thank Flag Link Mon Jun 1, 2009
Joanne, Hi!
Most banks consider the fact that a HELOC is a recourse loan!
The may say they are charging it off, but they are using language stating the borrower is still responsible for the difference.
0 votes Thank Flag Link Sun Apr 26, 2009
I would bet not. The HELOC is still recorded against the home so it is 'secured' by the property. If the 1st and 2nd are Wells Fargo, you may have something to work with. The HELOC might also go short along with the 1st but that is juggling a lot. The 1st usually doesn't care if the 2nd gets nothing. I would ask Dave Hamerslough, Kent Westerberg, or one of our other real estate attorney buddies because there may be some little known rule allowing this. I just don't think so . . .
Web Reference:
0 votes Thank Flag Link Sun Apr 26, 2009
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