What Happens After a Foreclosure to a HELOC?

A home equity credit line, or”HELOC,” is a form of second mortgage that gives you a credit line based upon the equity you take in your house. After foreclosure, the equity you enjoyed in your property disappears together with your ability to produce new purchases with your line of credit. This does not, however, exonerate you from your responsibility to refund any amount you previously charged with your HELOC.


The very fact that you had equity in your house can block you from further legal consequences from your HELOC lender after dropping your home to foreclosure. According to Texas A&M University, following foreclosure, your primary lender will sell your house and use the profits to pay back the amount due on your primary mortgage loan. Any other profits will be distributed to secondary lien holders, such as your HELOC lender, in the arrangement those lien holders recorded their own claims against your property. If you have enough equity in your house, the foreclosure sale will probably pay back the outstanding balance due on your HELOC.


In many cases, mortgage lenders sell foreclosure homes for less than fair market value merely to eliminate them from the bank’s accounting ledger. This can result in a mortgage lack. When a mortgage lack happens, the initial lender collects less through the house sale compared to the balance of their primary home loan. Thus, none of the profits are distributed to the next mortgage lender. The next mortgage lender may then take legal action against you for the amount you still owe on your HELOC.


In non-recourse states, such as California, primary mortgage creditors can’t sue customers for any lack left after the sale of their former homes. Unfortunately, this legislation does not apply to second mortgage creditors. After the principal lender repossesses the house, lien that the next mortgage lender held stops to exist–leaving the HELOC balance debt. The next mortgage lender may then file suit against the former homeowner for the balance.


If you keep making payments on your HELOC after the foreclosure of your house, your HELOC lender might not pursue legal recovery action against you personally. Given that filing a lawsuit against you to recoup the money you owe costs the lender extra money and resources, its in the lender’s best interests to let you continue making payments if you are ready to do so. The lower your balance you owe on your HELOC, the less probable that your lender is to sue you in the event that you continue to make normal payments.


Filing for bankruptcy following the foreclosure procedure is complete is 1 method of avoiding your obligation to pay off the balance you owe on your HELOC. Bankruptcy’s automatic stay, which goes into immediate effect once you fileprotects you from legal recovery action from any creditor. Since the HELOC debt becomes an unsecured debt, then based on your circumstances and the kind of bankruptcy, the bankruptcy court may discharge it and you will no more be liable for the balance.

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