Those who lost homes in the Great Recession may not be home free yet.
Two kinds of creditors have claims that can be expected to pop up like figures in Whack a Mole:
- home equity lenders whose liens were cut off or released in foreclosure or short sale
- unpaid homeowners associations
Let’s look at the possible scenarios and possible solutions should a “mole” appear in your financial future.
California is a non judicial foreclosure state. A completed foreclosure sale by a creditor cuts off (destroys) the lien of any creditor whose lien was recorded after that of the foreclosing creditor.
The lien of the junior creditor may be destroyed, but the debt remains. That it, just because the HELOC lender no longer has a lien on the foreclosed house, you may still owe them the money the lien secured.
We are beginning to see debt buyers and collectors popping up, demanding payment on formerly secured debts.
The first question is: do you have personal liability for the debt? California has a well developed statutory scheme that protects home buyers from personal liability on a loan used to buy a home in which they intend to live.
The California antideficiency laws confine the claim of the lender funding a loan to buy a home to recovering its money from the home. They cannot, by law, sue you for the money if the lien is cut off.
The collectors often don’t know whether the loan is protected by antideficiency provisions unless you tell them. So, if one of these collectors appears asking for payment on a protected loan, you have a defense and perhaps a Fair Debt Collection/Rosenthal Act claim against the collector.
Bankruptcy is, of course, another defense to collection. If you filed bankruptcy, got a discharge after taking out the loan in question, your discharge protects you, and again, may give you rights against the collector for violating the bankruptcy discharge injunction.
If you made a short sale of your home before California law changed in 2011, the lender may have agreed to the sale only if you agreed to remain liable for repaying the loan.
As an aside, I think any realtor who encouraged you to make the sale at the cost of agreeing to pay debts on a house you lost ought to be roasted over a slow fire, but that’s another rant.
If the loan you agreed to repay after the short sale was a purchase money loan, you should seek an attorney to evaluate whether that agreement deprives you of the statutory protection. At least one court has held that the antideficiency provisions can’t be waived.
Home Owners Associations
The second species of collectors we are seeing stalking former homeowners is the HOA. You have personal liability for the dues owed the homeowners association for so long as you are on title to the property.
Even if you walked away, you remain the owner, and remain liable for the dues until a foreclosure sale changes title to the condo.
A bankruptcy filed while you still own a condo is only a partial solution. Bankruptcy discharges your personal liability for the dues that have accrued before you file your bankruptcy case; any dues that come due after the filing remain a valid debt against you so long as you own the condo.
Remember the statute of limitations
For each of these kinds of claims, the statute of limitations applies. The statute gives you a slam dunk defense to a suit filed out of time.
But there’s a catch. It’s an affirmative defense.
You have to answer the complaint and plead the statute to get its protection. It does not prevent the creditor from filing the suit in the first place.
Generally, the California statute of limitations on contracts like loans and HOA dues is four years from the last activity on the account.
If you are served with a lawsuit, you need to take action or you will lose. If the court does not receive a properly filed answer, the judge assumes you agree you owe the money.
In most cases, you can discharge a judgment on a loan in bankruptcy. Whether bankruptcy is necessary depends on the bigger picture of your financial situation.
Watch out for moles!
Image courtesy of Flickr and KatieHarbath.