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4 October 2012

Second Mortgage Purgatory – After A Foreclosure

Second Mortgage Purgatory The most common post-foreclosure questions have to do with second mortgage debt. What happens to it? Well, unfortunately many borrowers are sent to a kind of second mortgage “purgatory” for 30 days to several years (depending on the statute of limitations in their state) following the auction of their property. Even in […]

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Second Mortgage Purgatory

The most common post-foreclosure questions have to do with second mortgage debt. What happens to it? Well, unfortunately many borrowers are sent to a kind of second mortgage “purgatory” for 30 days to several years (depending on the statute of limitations in their state) following the auction of their property. Even in some of the non-recourse states second mortgage holders retain the right to pursue any remaining debt after a foreclosure. Ultimately, the lender can choose to pursue the remaining debt, sell it to a third party debt collector or write it off as a loss.

If the lender pursues the remaining debt:

You will be personally served a Complaint and Summons. This is the initiation of a formal civil suit seeking a judgment for the amount of the principal balance, fees accrued and costs incurred to the lender during the foreclosure process. If this judgment is obtained, the debt collector may have the ability to place liens on the borrower’s property, garnish wages and/or levy their consumer accounts. In the event that the Defendant(s) cannot be found for personal service, most courts will allow for service by publication and/or mail. This is why it is a good idea to keep your mailing address updated with all entities involved in the foreclosure. You want to be aware of all action involving the property, foreclosure and any remaining debt.

These suits are extremely rare based on our experience. In fact, we’ve seen less than 1% of our sister company YouWalkAway.com become subject to a deficiency judgment suit. However, there is no way to predict if a lender will file suit. The suits we have seen have been filed against borrowers in a wide variety of financial situations. In our experience, it is more likely that a lender will pursue home equity line of credit (HELOC) accounts than purchase money loans. Also, we have seen more suits from Citibank, Wells Fargo and small banks and credit unions than other lenders.

Again, there is no way to predict whether or not a lender will eventually file suit – especially in states with longer statutes of limitations (the timeframe in which a lender can pursue the debt according to state law). The good news is that we have seen accounts settled even after a suit has been filed. Depending on their individual situation, some may also consider bankruptcy if they are facing a significant judgment.

If the lender sells the debt to a debt collector:

You will become subject to common collection tactics. This can include phone calls, account statements, demands for payments and requests to settle the account. After a foreclosure, a second mortgage is no longer secured by the property. It is essentially the same as credit card debt. Debt collectors often purchase these accounts at a significant discount and, as a result, we typically see these accounts settled for around 20% of the account balance. But again, there is no way to predict what will happen in a particular situation.

If the lender writes off the debt as a loss:

You are released from legal responsibility for repayment of the debt and will receive a 1099c in the January following the year in which the debt was cancelled. Under normal circumstances cancelled debt is considered taxable income for borrowers. In 2007, the Mortgage Forgiveness Debt Relief Act was passed. This excludes from taxation discharges of up to $2 million of indebtedness that is secured by a principal residence and was incurred as a result of the acquisition, construction or substantial improvement of the property.  This means that homeowners who foreclosed on a principal residence and have never refinanced by taking out a home equity line of credit are not responsible for taxes on the difference between the loan balance and the amount the property is sold at auction. Unfortunately, the protections provided by this Act are set to expire at the end of 2012. Will the Act be extended? We don’t know yet, but there are currently multiple bills being considered that would do so. These include:

Homeowners and Military Families Tax Fairness Act (S 3224) http://www.govtrack.us/congress/bills/112/s3224

Homeowner Tax Fairness Act (HR 4290) http://www.govtrack.us/congress/bills/112/hr4290

Mortgage Forgiveness Tax Relief Act (S 2250) http://www.govtrack.us/congress/bills/112/s2250

HR 4250 http://www.govtrack.us/congress/bills/112/hr4250

HR 4336 http://www.govtrack.us/congress/bills/112/hr4336

The Mortgage Forgiveness Debt Relief Act of 2007 is a federal Act. Most states conform, but this isn’t necessarily guaranteed. If you have any questions regarding the Act, or how it applies to your particular situation, we recommend contacting a licensed CPA with post-foreclosure experience. We realize that this may not be easy to find and hope to assist in local referrals in the future. If you are a licensed CPA with this type of experience, or know someone who is, please e-mail info@AfterForeclosure.com. Thank you!

Many borrowers choose to proactively settle second mortgages in order to avoid the possibility of a deficiency judgment. We currently do not assist in the settlement of second mortgage accounts but are working on referrals, credit repair resources and templates to aid in this process. Again, if you have any suggestions please feel free to let us know!

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