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Stop paying second mortgage - What happens next?

Author: Jessica Bennet
Community Mentor
Ask Jessica
Posted on: 17th Sep, 2008 12:30am
If you're in financial hardship and you're not paying second mortgage for 150-180 days from the due date, the lender may foreclose your property or file a lawsuit and seize your personal assets. Read through the section below and find out what happens if you stop paying second mortgage.



What happens if I stop paying second mortgage?


If you're not paying your second mortgage, and your home is upside down (combined balance on 1st and 2nd loan exceeds the home value), the lender may not file a foreclosure. That's because he'll have to pay off the first loan before he intends to retrieve the money he has invested on the 2nd loan.

However, even if the second lender forecloses and sells the home for less than the balance on 1st and 2nd loans, the law may not require you to pay the difference or deficiency balance provided the second mortgage is a non-recourse loan. Moreover, certain states have anti-deficiency laws which prevent one from paying the deficient amount provided the second mortgage (such as the 20% of an 80/20 loan) is used to purchase a primary residence.

However, if the second mortgage is a recourse loan, and your state doesn't follow the anti-deficiency laws, the deficiency balance needs to be paid off. In case you don't pay the deficiency or if the lender doesn't foreclose at all, here's what may happen:



  • Judgment/garnishment: The lender may file a lawsuit in the local court and get a judgment order to collect the unpaid balance. He can come after your assets such as bank account funds. The lender may have your wages garnished. Wage garnishment is a legal process in which an individual's earnings are partly or wholly withheld by the employer (as per court order) for repayment of debt.


  • Charge-off: The lender may issue a second mortgage charge off and assign or sell off your debt to a collection agency (CA). The agency will then try to collect the loan payments by all means. If you don't make any payment, here's what the CA can do:


    1. Harassing calls/letters: The collection agency is likely to harass you with repeated phone calls or payment notices/letters. They may even call you at odd hours and disturb you at your workplace, though such practices are against the Fair Debt Collection Practices Act (law which governs the practices of CAs).



    2. CA may file lawsuit: The CA may even sue you thereby leading you to legal hassles. They may even get a judgment order from the court and go for wage garnishment or seize your bank accounts.

      However, if your second mortgage debt is well past the Statute of Limitation (SOL), the collection agency cannot file a lawsuit. Even if they threaten to sue you after the SOL is over, send a cease and desist letter stating that your debt has crossed the SOL, so they shouldn't contact you any more. Still if they harass you for payments, file a complaint with the FTC or State Attorney General.

What to do if I can't pay second loan


Once your home is sold off at a foreclosure auction, the second mortgage debt or the deficiency balance on it will be considered as an unsecured loan which you can pay off in monthly installments. In case you can't afford to pay the deficiency balance in full, you may negotiate a settlement with the lender or the collection agency to whom the lender may have assigned/sold off your debt.

Paying your second mortgage will help you minimize the chances of getting hit with negative remarks on your credit report. You can thus avoid trashing your credit score and improve your chances of getting loans in future.
Posted on: 17th Sep, 2008 12:30 am
i have a 1st & 2nd mtg and i have requested a short sale. i am able to make my 1st mtg payment but i do not have the funds to make my 2nd mtg pymt. if i stop paying second mortgage what happens? can the 2nd lender foreclose on my house? and if not, what happens to the 2nd loan? if they charge off & put a lien on my house, then i will never be able to sale it because i owe more than the house it worth? any advice? also, if they charge off & put a lien on my house, can i then bk it?
Hi DAGWOOD,

Your loan has been discharged in your bankruptcy filing and you haven't reaffirmed the loan. Thus, the lender is not reporting this to the credit bureaus. If you stop paying the loans, the lender will foreclose the property and sell it off to recover his dues.
Posted on: 09th Nov, 2011 10:07 pm
When my ex-husband and I purchased our home in 2005 in New Jersey (maybe it was 2004) we received 80/20 mortgage loans. The home was foreclosed upon shortly thereafter. While the foreclosure took care of the 80% mortgage loan, I was left with the 20% mortgage. I have not made a payment since May 2006, and it will be 6 years since the last activity on the account in May 2012. In the meantime I have received letters from a debt collector. The last letter stated that it would settle for 20% of the $57k (this was the amount 20% loan). At this point it doesn't seem wise to make a payment.

My question is how likely is it that the debt collector will take me to court? I realize that I will not be liable for the loan after 6 months have passed, but I don't want to risk having my wages garnished. None of the letters have stated that the debt company has begun to take legal action against me. I understand that you cannot predict the future, but I am just wondering if I should truly be concerned.
Posted on: 22nd Nov, 2011 10:48 am
Hi worriedinnj,

If the SOL period for the loan is over in your state, then your debt collector won't be able to take you to court or take any legal actions against you. However, if the SOL period is not over, then the debt collector will take you to court.
Posted on: 22nd Nov, 2011 08:33 pm
i have a va backed mortgage,if i stop paying what happens? how much time to i have before i have to leave
Posted on: 10th Feb, 2012 06:00 am
Hi ron,

If you stop paying the mortgage, then your property will be foreclosed by the lender in order to recover the debts. After the foreclosure sale is over, you will get an eviction notice which will mention the time period within which you'll have to leave the property.

Thanks
Posted on: 10th Feb, 2012 11:45 pm
i am current on my 1st mortgage-----i cannot afford to pay my second mortgage. What are the consequences. i live in Florida.
Posted on: 24th Feb, 2012 09:19 am
Welcome shreya,

If you cannot pay off your second mortgage on time, the lender will charge off the loan and sell it off to a collection agency who will in turn contact you for the mortgage payments. Moreover, it will have a negative impact on your credit report.
Posted on: 24th Feb, 2012 10:03 pm
my 2nd sold to collection agent could they foreclose my house
Posted on: 27th Mar, 2012 10:41 pm
Hi moe,

They can't foreclose your property unless they get a judgment from the court.

Thanks
Posted on: 28th Mar, 2012 11:09 pm
We are in New Mexico and own a home that we built in 2003-2004. Our first mortgage was refinanced a couple years ago through the federal Home Affordable program, so our current interest rate is 2%. I am unemployed except for unpredictable contract/consulting jobs, but I can continue making the 1st mortgage payment. Balance is 209k.

The 2nd mortgage (HELOC) balance is 116k. It is interest-only for a couple more years. Putting the two together, I owe 325k. Value of home on today's market is questionable, though the latest numbers show the NM market may have hit bottom and started to turn around. The home next door to ours (comparable) was listed for sale in December at 380k and was sold, but we don't know the actual closing price. We also will need to have our own home estimated for market value by a Realtor. My best guess right now is about 300-325k. We're working on getting the house fixed up a little before getting the Realtor estimate. So we are just barely underwater or at break-even. Unlikely that we're right-side-up.

If I stop paying the HELOC, they would obviously be able to pay off the 1st and make enough toward the debt on the second to make foreclosing on me worthwhile to them. Do you agree? I am current on both mortgages right now, but we've run out of money. Have to cut back somewhere. The payments on the HELOC are about 450 a month.

I'm thinking Ch 7 plus short sale of property (assuming value comes in where, or below where, I think it will) is probably the best bet, as we also have credit card debt. Then we're at zero and can start over somewhere else. I originally inquired about Ch 13 to strip off the HELOC and include it in the bankruptcy and keep the house. But our financial position with regard to the house makes stripping off the HELOC impossible, according to our bankruptcy adviser (will probably hire her as our attorney).

How does the statute of limitations play into this scenario, if at all? I don't know what it is in NM or what it applies to.
Posted on: 22nd Apr, 2012 06:53 am
all income is from following which I understand is exempt from garnishment,
VA disability, veteran pension, and Social Security
Can it be garnished thru my bank?
Posted on: 25th Apr, 2012 02:32 pm
Hi billvanalstyne,

I did not understand what you exactly want to know about statute of limitations. Nevertheless, if you file Chapter 7, you will be able to get rid of all your debts, and will be able to start your financial life afresh.

Hi Jameson,

As far as I know, those income cannot be garnished through banks.

Thanks,

Jerry
Posted on: 26th Apr, 2012 03:35 am
Have a 1st and a 2nd mtg. Upside down. Foreclosure pending, cant pay secnd heloc and with AMERICAN HOME MORTG SERV (AHMIS), TERRIBLE COMPANY. Can I walk away from my 2nd? What would happen this is MO.
Posted on: 18th May, 2012 07:50 am
hi guest,

if you don't pay the second mortgage, then there are high chances that the lender will charge off the account and assign it to a collection agency who will in turn contact you and harass you for the payments.

thanks
Posted on: 21st May, 2012 01:09 am
What happens if I stop paying the second mortgage? If they take me to court (I live in California), might the judge rule that the foreclosure settled the 2nd mortgage?
Posted on: 23rd May, 2012 12:40 pm
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