Losing home in foreclosure won’t end worry

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Dear Bankruptcy Adviser,
Our home was foreclosed on Sept. 6, 2008. It was a nonjudicial foreclosure by the first mortgage holder. Both the first and second loans were “purchase money” loans. We have been receiving collection letters for the full amount of the second, plus fees, since six months after the foreclosure. I have been given conflicting answers as to whether they will sue us for the deficiency amount and been told our only way out is to file for a Chapter 7 bankruptcy. What should we be doing about this?
— Kelly

Dear Kelly,
Based on what you are saying, you are probably correct that the second mortgage company cannot sue you. As a bankruptcy attorney who makes a living filing bankruptcy cases, I can say that you likely do not need to file for bankruptcy protection to insulate you from a lawsuit over the second mortgage. Unfortunately, one thing I have learned from practicing law is that being “right” sometimes does not matter at all. The lender might try to sue you and obtain a judgment, hoping you do not know how to defend yourself.

Each state is different, but by the terms you are using — “nonjudicial, first and second purchase money loans,” it is likely you live in California. In California, the second mortgage lender cannot sue you for the balance on the second mortgage because of the type of loan. A “purchase money loan” means that you received a loan for the purpose of buying a home. It is likely the lender gave you a first mortgage and second mortgage loan simultaneously. This is traditionally called an 80/20 loan. That money was used to purchase the property, hence the term “purchase money loan.”

At the time of foreclosure, the loans were still considered purchase money loans if you never refinanced the property. Therefore, in California, a lender cannot sue you for the money owed on the second mortgage.

You also used the term “nonjudicial.” That refers to the type of foreclosure executed by the lender. The lender has two options available when it decides to foreclose on a property. The lender can sue you through the court system called a “judicial foreclosure,” or the lender can give you approximately three to six months notification and execute a “nonjudicial” foreclosure. The vast majority of foreclosures in California are via the “nonjudicial” process.

At this point, the collection letters you are receiving are coming from one of two parties. You are receiving letters from the lender that actually holds the loan note and believes you owe the money. That lender will make a decision whether to sue you or simply continue to send threatening letters in hopes that you’ll pay. Each state is different, but in general, the lender has four years from the date of last payment to sue you for the deficiency balance. Once the period passes, called the statute of limitations, you no longer can be sued for what you may owe.

Or, you could be receiving letters from a collection law firm or agency that bought the second mortgage at a discount from the original lender. That law firm or agency probably has absolutely no idea whether the loan was for purchase money. And frankly, it doesn’t care. If they can get a judgment against you, the type of loan does not matter. In the event you get sued, then you will need to prove that the loan was categorized as a purchase money loan. Legal costs can be high, but usually significantly less than what you owe on the second mortgage.

You need to be careful that this law firm or collection agency doesn’t try to slip a lawsuit past you and not give you a chance to defend yourself. This could result in a judgment entered against you without your knowledge, leaving you unable to defend yourself.

Be proactive and contact the party sending the letter. You will need to demand proof that you are liable for that loan and constantly monitor whether this lender is or has sued you already. Do not ignore the letters and make sure to stay on top of this until you confirm that you are in the clear.

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