• Home
  • Bankruptcy in Brief
  • ABC’s of Bankruptcy
  • Considering Bankruptcy
  • True Stories
  • Chapter 13
  • Blog
  • About
  • TOC

Northern California Bankruptcy Lawyer

On The Bankruptcy Soapbox

The Soap Box
  • How bankruptcy works
  • Mortgage Matters
  • Consumer Rights
  • You & Your Lawyer
  • Small Business
  • Family Law

Can You Be Sued After The Foreclosure

By Cathy Moran

after foreclosure

Foreclosure is traumatic enought without worrying whether lenders can sue you after foreclosure.

Breathe deeply. California has laws that limit what a mortgage lender can do to collect its money after the foreclosure. One addresses the rights of the creditor who conducted the foreclosure sale. The other borrower protection looks at what the loan was used for in assessing the creditor’s rights.

Foreclosure sale is sole remedy

California is a non-judicial foreclosure state. That means that a lender holding a deed of trust on real property doesn’t need to file a lawsuit to foreclose. The power of sale in the deed of trust the borrower signed gives them rights to hold a foreclosure sale without judicial supervision.

When a creditor with a consensual lien on real property uses the power of sale to hold a foreclosure sale, the creditor gives us any other collection rights on that loan.

The foreclosure sale is an election of remedies. The creditor elected to use the relatively streamlined non-judicial sale and waived its rights to collect any shortfall after the sale. This is sometimes called the “one-action” rule.

Loans to purchase homes have limits

There’s a second protection for homeowners who have been foreclosed upon.

California has a special limit on the rights of a secured creditor when the loan secured was used to purchase a principal residence. California Code of Civil Procedure 580b provides that a lender may not sue a borrower after a sale when the loan was used to acquire a home.

This Depression-era statute puts the risk of non payment solely on the lender who made the loan to buy the property. The lender’s sole remedy is to foreclose on its deed of trust.

The most frequent application of this statute is when there are two loans on a property and the senior-most lienholder forecloses. The foreclosure sale wipes out the lien that was junior to the foreclosing creditor. (The debt to the junior creditor survives, but not the lien on the property.)

The rights of the junior creditor to sue on the surviving debt depends on the use of the loan proceeds back when the loan was taken out. If the loan enabled the purchase of the home, the cut-off junior lender can’t sue to collect the debt.

If the loan was taken out by a borrower for other purposes, such as remodeling, business, or payment of other bills, the lender can sue to collect the outstanding balance. Such a loan doesn’t fall within the anti deficiency provision because it wasn’t used to acquire the home.

I was reminded of the purchase money antideficiency statute yesterday when meeting with a client who took out two loans to buy a home. The home was now in foreclosure.

For that client, the fact that both loans on the troubled property were taken out to buy the house protects them from any future collection action by either lender.

This client didn’t need bankruptcy protection on account of the foreclosure. They’ll be survivors of the mortgage meltdown.

More

Getting the house back after foreclosure

10 Things To Do To Keep Your House

Image by Mohamed Hassan from Pixabay

More from the Soapbox

  • Save The House Even AFTER The Foreclosure SaleSave The House Even AFTER The Foreclosure Sale
  • Resolve To Thrive In The New YearResolve To Thrive In The New Year
  • The Biggest Bankruptcy Mistake You Can MakeThe Biggest Bankruptcy Mistake You Can Make
  • How 13 Works To Save Your House From ForeclosureHow 13 Works To Save Your House From Foreclosure
  • Will I Get a Discharge in My Bankruptcy CaseWill I Get a Discharge in My Bankruptcy Case

Filed Under: Strictly California Tagged With: 2023, after foreclosure, borrower protections, foreclosure

About Cathy Moran

I'm a veteran bankruptcy lawyer and consumer advocate in California's Silicon Valley. I write, teach, and speak in the hopes of expanding understanding of how bankruptcy can make life better in a family's future.

Bankruptcy Basics

About The Soapbox

You’ve arrived at the Bankruptcy Soapbox, a resource of bankruptcy information and consumer law.

Soapbox is a companion site to Bankruptcy in Brief, where I try to be largely explanatory and even handed (Note I said “try”).

Here, I allow myself to tell stories and express strong opinions. We dig deeper into how to consider bankruptcy and navigate a bankruptcy case.

Moran Law Group
Bankruptcy specialists for individuals and small businesses in the San Francisco Bay Area

How Bankruptcy Works

Bankruptcy Alphabet: F is for First

In my Bankruptcy Alphabet, F is for First meeting of creditors. Lots of rumors exist about the that meeting; it produces unwarranted anxiety that is avoidable if you understand what's up. Let's check it out. The first meeting of creditors, also called the 341 meeting, is often the only time a debtor has to appear … Read more

More Posts from this Category

643 Bair Island Road
Suite 403
Redwood City, CA 94063
Phone: (650) 694-4700
Phone: (650) 368-4700

Categories

All content copyright © Moran Law Group. All rights reserved.