After a home is foreclosed on, what are the borrower’s legal responsibilities regarding repayment?

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After a home is foreclosed on, what are the borrower’s legal responsibilities regarding repayment?

In order to purchase a house 8 years ago, special financing consisting of 2 mortgage loans were taken out. However, the house foreclosed on 5 or 6 years ago. I am now being persued by a collection agency who is threatening a lawsuit and wage garnishment saying that I still owe for the 2nd mortgage. How is this possible if the house was foreclosed? Wasn’t the house collateral for the 2nd mortgage? Do I legally still owe this 2nd mortgage? What are my options?

Asked on September 17, 2014 under Real Estate Law, Virginia

Answers:

SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 7 years ago | Contributor

Foreclosure does not necessarily eliminate all mortgages. When the house is foreclosed upon, it will then (at some  point) be sold; when it is sold, first the expenses of the foreclosure and sale are taken out of the proceeds; then the remainder of the proceeds is applied against the loans. It will be applied first to the 1st mortgage (the higher-priority mortgage) then, only if there is something left after the first mortgage is paid in full, will the balance be applied to the 2nd mortgage--and that balance may or not be enough to fully pay the 2nd mortgage. If a mortgage is not paid in full--or if, as is often the case with 2nd mortgages, it is not paid at all (since often, nothing is left after expenses and paying down the 1st mortgage)--the lender can come after you for any unpaid amount. In the case you describe, it is likely that the foreclosure did not pay off the 2nd mortgage; if that's the case, you  are still liable for the unpaid amount and they can sue for it. If they win, they could take collections efforts, including wage garnishment. You have the right to see the documentation regarding the foreclosure, regarding how the proceeds of the home were applied, and regarding payment (or not) of the 2ncd mortgage, to see if you truly owe this money; but if turns out you do, you may not have any good defenses to the debt if all the paperwork, filing, etc. was done correctly. If that's the case, you may have to either negotiate/settle the debt for something or some payment plan you can make; or else consider bankruptcy. However, before doing any of that, retain an attorney to review the situation with you and represent you against the collections agency.


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