PERSONAL LIABILITY FOR MORTGAGE DEBT – DEFICIENCY JUDGMENTS
If You Default on Your Mortgage, Can The Bank Go-After Your Other Property?
If the bank wants to get a judgment (called a deficiency judgment) for the shortfall of the foreclosure sale, it can only do so in California by judicial foreclosure. If the bank uses the non-judicial (power of sale) foreclosure process, then it will not be able to go after any of your assets beyond the home that secures the note or loan.
If you have a second mortgage or home equity line of credit, and the first mortgage holder forecloses, the bank holding the 2nd mortgage will have the right to get a deficiency judgment against you. You might be personally liable for the unpaid portion of your debt after foreclosure.
California law regarding deficiencies is very complex. Before going further, you should understand some fundamental rules:
PURCHASE MONEY RULE: If the loan that is foreclosed is the original loan on your principal residence, the bank cannot do anything except take the property. It cannot go after any other assets. [Code Civ. Proc. § 580b]
ONE-ACTION RULE: A lender can only take one action against you. If the lender starts a non-judicial foreclosure proceeding, then the lender cannot pursue a judgment against your other property. If the lender wanted to get a judgment against your other property, it would have to foreclose by the judicial foreclosure process, which is rare. BE AWARE that a lender holding a second mortgage or home equity line of credit that is wiped-out in the foreclosure proceeding can still pursue a judgment against you. [Code Civ. Proc. § 726(a)]
FIRST ACTION RULE: The bank (even a 2nd mortgage or equity line) has to try to recover the property before it can try to go after your personal assets. This means that they have to foreclose on the property before they can do anything to come after your personal property. This rule often becomes important when there is a default on a second or third mortgage when there is little equity in the property because the bank might not have much reason to foreclose as it must pay-off all superior mortgages with sale proceeds. [Code Civ. Proc. § 726; Walker v. Community Bank (1974) 10 Cal. 3d 729, 734]
GET ADVICE ON TAX IMPLICATIONS! There may be serious tax implications to foreclosure or the various alternatives to foreclosure. Consult a tax professional before you act on the general rules discussed here. If your loan is a purchase money or other non-recourse loan, then you may not have to pay a tax penalty upon foreclosure or other resolution with the lender. If your loan is a recourse loan (most re-financed loans, 2nd mortgages, and equity lines of credit) then you may be subject to tax on the amount not recovered by the lender. Bankruptcy or insolvency may eliminate these tax consequences.