Many clients have been asking me lately what happens to a second mortgage or line of credit if their home is foreclosed on. Usually in a foreclosure the second mortgage lender or line of credit lender will receive little to nothing on the debt. If this happens you can still be held liable for what you owe on these loans. This is known as a "deficiency balance". For example, if you owe $200,000 on your first mortgage and $60,000 on your second mortgage and the first lender forecloses and receives less than $200,000 in the sale, you may still be liable for the $60,000 second mortgage or line of credit.
If you file bankruptcy, this $60,000 is simply treated as unsecured debt just like a credit card or medical bill. In most cases the debt can be discharged with the bankruptcy.
Given the weak housing market this sort of deficiency balance is very common. The good news is that with bankruptcy you can protect yourself from liability in this situation.
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