Does a purchase money HELOC convert to unsecured debt after foreclosure by the first? 24 Answers as of August 09, 2011

We bought a condo using 80/20 zero down financing. The second is a HELOC which was never redrawn on or refied. The first foreclosed in Nov 08 and sent a 1099. The second continued to send bills and then sold the loan to a collection agency. Now both the second and the collection agency are showing as charge off's with a balance owed on my credit report. If the 2nd cannot legally collect the debt then how can they sell it to a collection agency?

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Financial Relief Law Center
Financial Relief Law Center | Mark Alonso
When a property has two mortgages on it, and only one forecloses, then the other doesn't always recover the amount owed to them. In your example below, you had a 1st and a 2nd (HELOC) on a property that you lost in foreclosure, because the first foreclosed on you. That is a legal right of the lien holder, to essentially "take back" the property that you are not paying for. If the 1st uses "foreclosure" to collect on the debt, then they cannot use additional means of recovering the amount owed, unless they opt for something call "judicial foreclosure", which is usually not the case in CA.. but regardless in this case, they cannot seek a deficiency judgment against you because not only did they most likely use non-judicial foreclosure, these debts are purchase money, and purchase money debt is debt that cannot seek a deficiency judgment against you in CA. Since your 2nd was used as part of the purchase here, you should be able to argue that they cannot continue to collect from you. However, if the 2nd is able to show that technically they are NOT purchase money, then they may be able to still collect from you since they didn't foreclose on you at all. If this issue persists you could opt to file for bankruptcy, if you can qualify for a chapter 7, and then just have this debt wiped out. You may want to contact an attorney to discuss this situation in more detail. Also, with respect to the 1099 matter, you may want to view this website and then possibly seek some tax advice regarding the 1099 you received:
Answer Applies to: California
Replied: 8/9/2011
Heupel Law
Heupel Law | Kevin Heupel
Yes, a HELOC becomes an unsecured debt after a foreclosure. A "charge off" on your credit report simply means that the mortgage company and collection agency sold the debt to another debt collector. It is still a valid debt to collect and will be until November 2014. You either need to make payment arrangements or consider filing bankruptcy.
Answer Applies to: Colorado
Replied: 8/9/2011
Theodore N. Stapleton, PC
Theodore N. Stapleton, PC | Theodore N. Stapleton
The 2nd mortgage lien is foreclosed out by the 1st mortgage holder unless they buy the property at the foreclosure sale. If the lien is foreclosed out they can still sue on the note. I am happy to discuss these and any other questions you have. Please can to schedule a free consultation.
Answer Applies to: Georgia
Replied: 8/8/2011
Law Office of Lynnmarie A. Johnson
Law Office of Lynnmarie A. Johnson | Lynnmarie Johnson
Just because they show it as charged off doesn't mean you don't still owe it. They can sell it to another agency and they can try and collect it. Just because it is no longer secured by the house due to your foreclosure doesn't mean that you still don't owe it.
Answer Applies to: Michigan
Replied: 8/8/2011
Law Office of John C. Farrell, Jr.
Law Office of John C. Farrell, Jr. | John C. Farrell, Jr.
Anyone with a line on your property can foreclose. As part of the loan collateral was offered. If they are security interest holder then they can still come after you for any deficient amount. For example if you bought a car and defaulted on the loan they would first repossess the car then they would likely sue you for any amount that is still owed on the loan after the sale of the car. This is called a deficiency judgment. In the world of secured interest which is governed by UCC Article 9 the senior lien holder takes priority then everyone else waits in line with their hands out.
Answer Applies to: Massachusetts
Replied: 8/7/2011
    Lake Forest Bankruptcy
    Lake Forest Bankruptcy | Anerio V. Altman, Esq.
    You may be right and their collection may be illegal. You are referring to California's Anti-Deficiency laws which prohibit the collection on a PMSI loan. The 2nd is arguably a PMSI loan and they should not be able to collect. You should consult an attorney.
    Answer Applies to: California
    Replied: 8/7/2011
    Breckenridge and Walton
    Breckenridge and Walton | Alan D. Walton
    No. The lender always has the right to either sue or foreclose. Since the first foreclosed, the lender is left with the right to sue. It is not clear why you think the second cannot legally collect. If you filed a chapter 7 bankruptcy that may be true, otherwise it is not.
    Answer Applies to: Michigan
    Replied: 8/7/2011
    Grasso Law Group
    Grasso Law Group | Charles Grasso, Esq.
    The second loan (the HELOC) does not have a secured interest in the property because the first foreclosed. However, the debt is still a valid unsecured debt and you may still be liable for it (or to put it another way, the creditor can try and collect). If the second loan was purchase money then you may be covered under the anti-deficiency statutes as a defense to the collection. You should check with an attorney and discuss your particular circumstances.
    Answer Applies to: California
    Replied: 8/7/2011
    Kalra Law Firm
    Kalra Law Firm | Madhu Kalra
    After foreclosure by the 1st Trust Deed holder, HELOC is treated as unsecured debt. It is a collectible debts, enforceable at law.
    Answer Applies to: California
    Replied: 8/7/2011
    Colorado Legal Solutions
    Colorado Legal Solutions | Stephen Harkess
    A second mortgage is an unsecured debt after foreclosure. When you took out the loan you signed two documents - a promissory note which obligated you to repay the money and a deed of trust which attached the debt to your house. The foreclosure wiped out the deed of trust meaning that the creditor could no longer go after the house. However, you still owe the promissory note. Only settlement or a bankruptcy discharge will wipe out the note. You owe that money and the creditor can try to collect it - even by filing suit and getting a judgment against you and garnishing wages or bank accounts if they wish.
    Answer Applies to: Colorado
    Replied: 8/7/2011
    Law Offices of Alexzander C. J. Adams, P.C.
    Law Offices of Alexzander C. J. Adams, P.C. | Alexzander Adams
    Yes. However, there is a new law in Oregon that can prevent collection on an 20% from and 80/20 in certain situations. Be sure to ask your lawyer about this.
    Answer Applies to: Oregon
    Replied: 8/7/2011
    Janet A. Lawson Bankruptcy Attorney
    Janet A. Lawson Bankruptcy Attorney | Janet Lawson
    You are correct - they can not collect. That was a purchase money loan. See a lawyer about suing them. I hope you didn't pay taxes on the 1099. A good CPA can probaly get you out of that.
    Answer Applies to: California
    Replied: 8/7/2011
    Mankus & Marchan, LTD
    Mankus & Marchan, LTD | Tony Mankus
    If you have not filed bankruptcy then you still legally owe whatever balances have not been paid after the foreclosure and sale of your residence. The 2nd mortgagee with the HELOC loan turned it over to a collection agency for collection. The collection agencies don't usually purchase the notes; they simply try to collect on the balances due and get a percentage of what they collect.
    Answer Applies to: Illinois
    Replied: 8/6/2011
    Law Office of Michael Johnson
    Law Office of Michael Johnson | Michael Johnson
    Yes if the foreclosure sale did not cover the balance of both mortgages.
    Answer Applies to: Florida
    Replied: 8/6/2011
    Eric J. Benzer, Attorney at Law
    Eric J. Benzer, Attorney at Law | Eric Benzer
    Perhaps
    Answer Applies to: Maryland
    Replied: 8/6/2011
    Indianapolis Bankruptcy Law Office of Eric C. Lewis
    Indianapolis Bankruptcy Law Office of Eric C. Lewis | Eric Lewis
    There is nothing in the facts that you provided that would prohibit the junior lien holder (2nd mortgage or HELOC) from pursuing you for the amount of the outstanding balance.
    Answer Applies to: Indiana
    Replied: 8/6/2011
    Judith A. Runyon, Esq. Attorney at Law
    Judith A. Runyon, Esq. Attorney at Law | Judith A. Runyon
    The heloc is a debt that you still owe after foreclosure unless you filed bankruptcy. Then it was discharged as an unsecured debt
    Answer Applies to: California
    Replied: 8/6/2011
    Ross Smith, Attorney at Law
    Ross Smith, Attorney at Law | Charles Ross Smith III
    You ask a very good question. Yes, the second mortgage should have been converted to an unsecured deficiency judgment by the foreclosure. But that does not make it noncollectable. Many times the bottom feeders who buy these deficiencies for as little as 1% don't get very good documentation from the sellers. And yes, sometimes the debts are sold to more than one buyer. When a debt purchaser tries to collect on purchased debt, the judge should make sure that the puchaser can demonstrate that they truly own the debt. Regrettably, this is not always done. If you don't hire an attorney, you are defenseless. Of course these are all dischargeable in bankruptcy. One final note; do not pay tax on the phony 1099 you got. Instead, amend your taxes, add on a Form 982. If you were insolvent (you probably were) at the time, you do not owe the tax. good luck.
    Answer Applies to: Ohio
    Replied: 8/6/2011
    Melinda Murphy Dionne, PC
    Melinda Murphy Dionne, PC | Melinda Murphy Dionne
    Why do you believe that the 2nd is unable to collect? The foreclosure by the 1st mortgage holder did not extinguish your obligation to pay the 2nd mortgage. The foreclosure converted the 2nd's position to that of an unsecured creditor but it did not forgive you of the debt.
    Answer Applies to: Alabama
    Replied: 8/6/2011
    The Law Offices of Mark Wm. Hofgard, Esq.
    The Law Offices of Mark Wm. Hofgard, Esq. | Mark Hofgard
    There are some potentially complex issues surrounding the right of the assignees (collection agency) to collect on the second as unsecured debt. Was the lender on the first and second the same? What was the sale price of the first - more than the amount due under the first? Was the sale price in excess of the fair market value of the property? If the holder of the first and second are the same, it is possible that the doctrine of equitable merger may apply. If the foreclosure sale on the first was in excess of the fair market value at the time, there may be excess proceeds to which you are entitled. A complete review of the facts and circumstances is necessary to make this determination. The other issue is the validity of assignment of the debt represented by the second to the collection agency. Were they properly assigned the debt for value?
    Answer Applies to: Colorado
    Replied: 8/6/2011
    Carballo Law Offices
    Carballo Law Offices | Tony E. Carballo
    Interesting question but most likely the HELOC was not really considered a purchase money loan although that is how you used the money. Lots of weird things were happening then. The mortgage brokers were trying to get around restrictions on second loans and who knows what else. If the second was not a purchase money on your residence then it becomes an unsecured debt like a credit card or personal loan once the property is sold at a foreclosure sale. You need to get all the escrow documents and consult with a lawyer as to whether or not the HELOC qualifies as a purchase money loan. Read all the papers first because the application may answer the question as to whether or not you represented to the bank that the money was to purchase the property or for something else. If it was truly purchase money on your residence then your lawyer needs to send a letter to the collection agency telling them to stop contacting you and threatening a lawsuit for a violation of the consumer debt collection laws. Otherwise, you need to settle the debt for the least amount possible or file a bankruptcy case.
    Answer Applies to: California
    Replied: 8/6/2011
    Ashman Law Office
    Ashman Law Office | Glen Edward Ashman
    Why do you think they can't collect? Of course they can collect. They can sue you. And after that they go after your paycheck, assets and bank account.
    Answer Applies to: Georgia
    Replied: 8/6/2011
    Law Office of Maureen O' Malley
    Law Office of Maureen O' Malley | Maureen O'Malley
    How can they not collect? You received funds which you promised to pay, whether it's secured or unsecured
    Answer Applies to: Virginia
    Replied: 8/6/2011
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