Am I Responsible For 2nd Mortgage on My House (That Was Charged Off), If the Bank Forecloses On the 1st One?

Question: Our home is in foreclosure and we have been working with the lender to get a loan modification on it for over a year. There was a second loan on the house, with the same lender, that we thought was "settled" but when we called the lender about a year ago to confirm that it was "settled", we were informed that it had been charged off about three years ago. If the first loan is foreclosed upon, will the bank come after us? If they don't for the first, will they for the second loan? We contacted an organization called NACA, and they have been assisting us with trying to achieve an affordable monthly payment on our house, and to avoid foreclosure. I'm getting divorced and the Judge told me he would award me the house, but that I would have to sign a waiver claiming sole liability on the home. I don't know yet if I will be able to get the loan modification and I don't want to claim all liability if the house goes into foreclosure with the second loan being charged off and me still being responsible.

Response: Once the second loan is charged off, the lender generally sells it to a collection agency to try to recover some money from you (generally a percentage of what is owed). The fact that your loan was charged off to begin with indicates that the property had no equity and that it was not economically feasible for the 2nd lender to pursue foreclosure. Therefore, if foreclosure actually takes place, all or most of the money recovered will go to the 1st lender to satisfy the debt. By having charged the second loan off, the loan is no longer secured. It will be treated as any other unsecured debt, like a credit card debt. If you have no assets that the bank could take if the home is foreclosed upon in order to satisfy a deficiency judgment (if the bank chooses to pursue it), then it is very unlikely that you could be at risk. Worse comes to worst, you might be able to file for bankruptcy to discharge your unsecured debts. You should note, however, that you can't get the loan modified if you divorce unless you assume financial obligation of the debt. In order for the loan to be modified, you need to be able to show financial affordability, or 31% of your gross monthly income should pay off your mortgage in 40 years at 2%. NACA is a 3rd party that works with the bank to help you get the loan modified. Generally, the bank cannot deal with you directly once NACA is involved unless that agreement is severed. Just stay on top of what's going on to make sure your loan is reviewed for a loan modification. If the first is modified, then it is most likely you won't have to worry about the second until you sell the home.

In the legal blog, Attorney Svetlana Kaplun addresses typical questions our firm has received from our clients, or come across from homeowners related to foreclosure, foreclosure defense, loan modification and bankruptcy topics.

The information contained in the legal blog of Attorney Svetlana Kaplun is for informational purposes only, and should not be construed as a legal advice on any subject matter. Please read our full disclaimer or contact the Law Office of Svetlana Kaplun, P.C. by telephone at 718-444-1115 for more information.
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