Knowing whether your money is safe after foreclosure


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Dear Bankruptcy Adviser,
If I own 2 homes and I let one of my mortgages go into foreclosure, can the bank levy my account for the delinquent debt? If so, should I file for bankruptcy on one house instead of allowing the bank to foreclose?
— Tammy

PhotoAlto/Antoine Arraou/Getty Images

Dear Tammy,
You have 2 issues you need to address. First, will the lender sue you after the house is sold? Second, can the lender take money directly from your bank account? Let’s take these questions one at a time. Your first question is:

Will the lender sue me?

You must be very careful when you allow a rental property to go into foreclosure. Most states do not protect the property owner from deficiency balances that take place after the rental property is sold or foreclosed on. A deficiency balance is the amount owed after a property is sold. For example, you owe $200,000 on a mortgage loan and sell the property for $150,000. The deficiency balance is $50,000, which could be your responsibility to pay.

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The lender will determine whether it is worth it to sue you for the deficiency balance. That will depend on the state in which you reside and the amount of the deficiency.

I hope that you have made a good faith effort to modify your mortgage loans before foreclosure. Even look into a short sale if the property value is less than what you owe. While your credit score could still take a hit, at least you will have the opportunity to avoid the extremely negative “foreclosure” mark on your credit report.

Tread carefully with any short-sale agreement. Lenders have very strict guidelines before approving one. Credit unions and traditional banks may require that you agree to pay the deficiency balance remaining once the property is sold. That could be a sizable amount of money and could push you into bankruptcy.

Is your money safe?

Your 2nd question — is my money safe — is a bit more complex.

Money in your bank accounts may be protected. In general, if you have a mortgage loan and checking account with a traditional bank, and you fail to make your mortgage payment, the bank cannot take money directly out of your checking account. The bank must follow the normal procedures of suing you and getting a judgment. Then it needs court approval before taking money directly from your account.

However, you need to be very careful regarding the type of bank account you have with the traditional bank. The type of debt determines your risk. If the debt you have with a bank is considered to be “business debt,” regardless of whether you have personally guaranteed the debt, then a bank can more easily take money out of personal or business checking accounts. You ought to discuss this with an seasoned bankruptcy attorney because of the significant risk to the money you have in the account.

Credit unions do not have to follow the judgment process and can take money directly out of your checking, savings, money market and possibly your IRAs. You must act immediately, and do not think that the credit union will make an exception, even if you have a 20-year history with it. Credit unions do not take kindly to any financial loss.

The safest approach is to close down all checking, savings and investment accounts when you have delinquent credit accounts. Don’t fool yourself into thinking that the bank will consider the length of your relationship with them. Past relationships do not matter at all.

The safest approach is to assume that your money is not safe and open up a new account elsewhere. You don’t want to find out the hard way that your money has been taken and you cannot pay your bills.

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