Can the Bank Come After Me After Foreclosure on a Second Mortgage?

You have been through the trauma of a foreclosure, losing your home and all of the security that goes with it. Then, your home was sold at auction and did not bring in enough money to pay off the second mortgage, leaving you still owing money. In many cases, the mortgage company can attempt to collect this amount using any legal procedure available to it.

Deficiency Balance

A loan balance that remains unpaid after the home is sold in a foreclosure is called a deficiency balance. When a mortgage holder forecloses on a home, it will sell the home either through a private sale or at a public auction. The money that the house brings at sale goes to the first mortgage to pay it off. If any money is left over after that, it is paid toward any other mortgages on the home. When housing values have dropped, it is possible that the home is worth less than the balance of the mortgages, resulting in a deficiency balance. Depending on the state in which you live, the bank can sue you for this balance.

Short Sale

If your home will not sell for enough money to pay off all of the mortgages, you may want to consider a short sale. With a short sale, you place your home on the market for its value. When you receive an offer on your home, you present it to the bank to see if it will accept it. Ideally, you want a first and second mortgage holder to accept a short sale without recourse, meaning that they accept whatever amount the house brings as settlement in full for the mortgages. If they agree to this, they will not be able to pursue you for any deficiency balance.

Nonrecourse States

In more than 30 states, banks can legally pursue you for the recourse amount of a mortgage after foreclosure. In the other states, the banks may not be able to collect on you, depending on certain factors. If the second loan was used to purchase the home, which is common in an 80/20 mortgage where the down payment is financed in a second mortgage, you cannot be sued for any deficiency in a nonrecourse state. The same is true if the second mortgage was used for home improvements. If you used the second mortgage proceeds to purchase a car or other property, the protection from lawsuit on the deficiency balance is more uncertain.

Lien Stripping in Chapter 13 Bankruptcy

If you have a second mortgage that is completely unsecured, meaning that the value of the home is less than the payoff of the first mortgage, you may be eligible to do a lien strip in a Chapter 13 bankruptcy. With a lien strip, the bankruptcy judge will determine that your home's value is lower than the first mortgage balance by using an appraisal. He will then have a hearing and issue a discharge to the amount of the second mortgage that is unsecured by the value of the home. The bankruptcy judge cannot reduce the balance of a first mortgage.

References

• CNN Money.com; You Lost Your House -- But You Still Have to Pay; Les Christie; February 2010
• Bankrate.com; Losing Home in Foreclosure Won't End Worry; Justin Harelik; November 2009
• American Bar Association; Some Residential Mortgages Can Be Modified Under Bankruptcy Code § 132 2 ; Marc A. Ben-Ezra & Asher Perlin; July 2003