Do you still owe money after being foreclosed on in a non recourse state?

Answer 1

This depends on what kind of loans you had on the home. The law in non-recourse states such as California states:

1)The lender may only take one action against any borrower to satisfy or collect on a debt when that debt is a real estate loan. This means they can sue you or foreclose or take a settlement offer, but whatever they choose is the only thing they can do.

2)The lender must act against the property first. This means a mortgage company can not sue you instead of foreclosing.

This is assuming it was a non-judicial foreclosure (which most are) where they invoked the right to sell the house at auction and did not take you to court to posses the home.

The tricky part comes up when there is a second mortgage involved. Lets say you have a first mortgage of $200k and a second of $50k and your home is now worth $100k. If you stop paying both loans, the second will likely NOT foreclose on you because they would have to pay off the first from the proceeds of the sale. This means the first would loose $100k when the house sells for $100k (ignoring costs and commissions), and the second would have gone to all the time and money to take the house and received no money for their efforts. They can NOT take another action against you because they have to act against the property first. Now say the 1st mortgage decides to foreclose. They auction the house and you no longer own it. They took a loss, but the second lost everything. Now there is no home to take an action against, so the second mortgage company is free to attempt to collect the debt.

Now we have to think of this from their perspective. They've lost a lot of money. They don't want to let that go, but they also want to stop loosing money. Suing someone takes time and money, and they can't be sure you'll ever pay. So, they may sue you, may send the file to collections and have an agency try and get money from you, they may wait until they have a large batch of such loans and send them off at once, or they may decide to cut their losses and do nothing. They are less likely to haunt someone over $5,000 than $75,000, and less likely if the person is unemployed or retired....there are quite a few variables.

At the end of the year any debtor that charged off a loss will send you a 1099c form for forgiven debt that you theoretically have to pay taxes on. Check with your CPA, you may have a "negative net worth" (liabilities totaling more than assets) and may be able to get out of paying those taxes by claiming insolvency.

So the short answer is: after a normal foreclosure the 1st mortgage company can NOT persue you for money in a "one action" state. A second mortgage company can. They will both send you a 1099c and you may have to wotk with a CPA to avoid paying taxes on that amount as income.