Lawsuit After a Foreclosure

It looks like the bank is foreclosing on my home. Do I need to declare bankruptcy?

This short answer is that you probably will not have to file for bankruptcy as a result of the foreclosure unless (and this is a really big “unless”) you have a non purchase money 2nd on your home.

Of course, there may be other reasons you need to declare bankruptcy e.g. too much credit card debt.

Why would you need to declare bankruptcy as a result of a foreclosure?

Let's assume when you bought your home it was worth $500,000 and you took out a mortgage which now has a balance of $450,000. Now, when the bank is foreclosing, the home is only worth $300,000. So after the foreclosure, the bank has received a piece of property worth only $300,000 but you owed the bank $450,000.00.. The bank is still owed the balance of $150,000.00. This balance is called a “deficiency.”

Can you be held liable for the deficiency? The basic answer is “yes” unless one of the anti-deficiency rules apply.

There are 2 Anti-deficiency rules that can help you out:

Anti-deficiency Rule 1. One Action Rule in CCP 580d. One of the most important exceptions is the “one action” rule set forth in CCP 580d. Under this rule the bank can only bring one legal action in connection with the foreclosure.

Most banks use a streamlined foreclosure procedure called “non-judicial foreclosure” The bank just fills out a few papers and “voila” they’ve foreclosed and they own your property. But if the bank uses this procedure then they can not bring a second action and sue you for the deficiency.

Anti-deficiency Rule 2. This is the California anti-deficiency statute. This anti-deficiency law (California Code of Civil Procedure section 580b) prohibits a deficiency judgment against a borrower who took out a loan to:

a) Purchase (as opposed to a refinance)
b) residential property
c) where the property is one -to -four units.

So now let's see how these anti-deficiency rules are applied.

Example 1: When you bought your home, which is a single-family residence, it was worth $500,000 and the mortgage to purchase the property has a balance of $450,000. You never refinanced. Now, when the bank is foreclosing, the home is only worth $300,000. There is a deficiency of $150,000.

You can not be sued for the $150,000 for 2 reasons: Anti-deficiency rule 2 (CCP 580b) applies. Also, the bank will almost undoubtedly foreclose using the nonjudicial foreclosure method so Anti-deficiency rule 1 will almost certainly apply. You are safe.

Example 2: Same as Example 1 but you refinanced. You will probably still be ok. Anti-deficiency rule 2 won’t help you because the loan was not for the purchase of the property. It was a refinance. But the bank will probably foreclose using the non-judicial foreclosure method so Anti-deficiency rule 1 will almost certainly apply. You are almost certainly safe.

Example 3: Same as Example 1 but when you purchased the property you also took out a $20,000.00 2nd to help you pay the purchase price. When the 1st forecloses the 2nd deed of trust is wiped out and there is a $20,000 deficiency as far as the 2nd is concerned. Anti-deficiency rule 2 will protect you. You are safe.

Example 4: Same as Example 3 but you took out the 2nd after you purchased the property and used the money to fix up the property, pay credit cards or take a vacation. Anti-deficiency rule #1 doesn’t apply since the holder of the 2nd did not foreclose by the non-judicial foreclosure method. And Anti-deficiency rule #2 doesn’t help because the 2nd was not a purchase money loan. You are in trouble.
In example 4 you can and probably will be sued for $20,000.00 plus late fees, interest, and costs by the holder of the 2nd.

Example 5: Same as Example 4 except that the bank that holds the 1st and the 2nd are the same entity when the foreclosure occurs. Even though technically the holder of the 2nd didn’t foreclose on the 2nd the courts have held that this amounts to a deficiency barred by 580d. Walter E. Heller Inc. v. Bloxham, 176 Cal.App.3d 266 (1985)

Please click here for a discussion of whether you can be sued for a deficiency after a short sale.

If you find yourself in any foreclosure situation call me and I will analyze your case and determine if you are going to be sued after the foreclosure. If you are in this unfortunate situation then we need to talk about bankruptcy (which takes care of the problem).

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