Mortgage Liability After Foreclosure In California
One major issue that homeowners face these days is to determine what liability they might have after the lender on their first mortgage forecloses with a trustee sale.
Purchase Money Mortgage. In general in California, loans used to purchase a residence are what are called non-recourse loans or purchase money mortgages as defined in California Civil Code Section 580b. This means that the lender on any loan, including 1st or 2nd, that was only used to purchase the residence cannot come after the homeowner after they sell the home for less than what is owed. All of the loan proceeds must be used to purchase the residence, so if some of the funds were to get cash out or used to make improvements to the home, it is not likely a purchase money mortgage and the bank can come after you personally.
Refinances, lines of credit. In most cases, a refinance was not used to purchase the property and would subject the homeowner to personal liability. Similarly, a cash out line of credit, equity line, or other 2nd mortgage would also be subject to personal liability. Since most homeowners these days did some form of refinance, they are probably looking at personal liability.
Effect of Trustee Sale On Liability. When the lender chooses to conduct a trustee sale, which is a non-judicial type of foreclosure and the preferred method of foreclosure in California, they are choosing which one action allowed to assert their rights. Since they chose this one action, they cannot then later sue the homeowner in court for a deficiency judgment. This means that if your home was sold at a trustee sale, your liability on the first mortgage is typically gone. However, the action choosen by the first mortgage holder does not affect what rights the second or other lien holders may pursue. They can often sue in court for deficiency or other types of judgments.
Liability On Non-Recourse Second Mortgage. Just because your second mortgage was purchase money and would normally not subject you to personal liability, there are times where you can get sued. There is an exception to the rule for unsecured or partially secured loans. These situations are very fact specific, so one should consult an attorney to determine what possible liability there may be.
Be Cautious In Walking Away From Your Home. As you can see, there are times where simply walking away from your home will not solve the problem. Often lenders wait years before deciding to sue to collect when the person may be in a better financial situation. Home owner associations will sometimes try to come after foreclosed homeowners for past due fees or assessments. You should completely review your specific circumstances before deciding to walk away. There may also be tax implications from the debt being forgiven by the first mortgage holder, as it is treated as forgiveness of debt income.
How Do I Protect Myself. The best way to answer this is to clearly evaluate your situation before deciding to walk away from your home. Often the protections provided by the bankruptcy code will wipe out any personal liabilities that may result after a foreclosure. After a foreclosure, the homeowner's credit is very negatively affected and a bankruptcy filing will usually put them in a better position credit wise since it can get rid of all the excess debts still left over.
The worst thing a person can do is ignore the situation, walk away, and hope nothing bad comes of it. Consult a real estate or bankruptcy attorney, as well as a tax advisor, to determine what liability you may have in your particular situation.