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California Mortgages – Recourse vs Non-recourse Loans – Options in Foreclosure

Mortgages in BankruptcyRecourse vs Non-recourse Mortgage Debt

The main difference between a recourse vs non-recourse loans has to do with which assets a creditor can go after if the debtor defaults on the loan.  Under both types of loans, the mortgage company can go after assets that were used as to secure the loan.

The difference comes if money is still owed after the collateral is seized and sold.  Under a recourse loan, the creditor can go after the debtor personally for any deficient money owed.  For example a creditor can levy bank accounts or garnish wages.  Under a non-recourse loan, if there is still any money owed after the collateral is seized and sold, the mortgage company  is out of luck.  The mortgage company must absorb the deficiency as a loss.

In California, purchase money mortgages are considered non-recourse loans where the purchased house is used as collateral to secure the mortgage debt.  To go along with that, California is a state where the mortgage company can foreclose on a delinquent mortgage debt through a judicial or non-judicial foreclosure.  Although mortgage companies have either option, most elect to foreclose by non-judicial foreclosure.  The reason is because judicial foreclosures are more time consuming and costly, even though mortgage companies may be entitled to a deficiency under the judicial process.  Therefore, most mortgage companies elect to foreclose under the non-judicial process even though they will not be able to recover any deficient money under the non-recourse rule.

Below are options for homeowners who are facing foreclosure:

Option 1 – Keep the home

A) Pay back the mortgage arrears

The simplest way to stop a home from going through foreclosure is to pay the mortgage arrears and get current with the loan.

B) Loan Modification

A homeowner can attempt to get a loan modification through their mortgage company.  Loan modifications are an excellent way to reduce monthly payments.  When trying to obtain a loan modification, homeowners must be diligent and constantly stay in touch with their mortgage company. There are many horror stories of homeowners attempting to get loan modifications without any luck. Therefore, it is imperative that the homeowner sends every document requested and follows up with the mortgage company until they get an answer.

C) Chapter 13 Bankruptcy

Homeowners can also file a Chapter 13 bankruptcy to save their home. In a Chapter 13, the homeowner can pay back their mortgage arrears over the course of 3 to 5 years. If thee homeowner stays current with their mortgage payment after filing the bankruptcy and keeps up with their Chapter 13 payments, then the homeowner will be current with their mortgage after the 3 to 5 year period is up.

Option 2 – Surrender the home

Another option is to surrender the home.  However, this may lead the homeowners to the recourse loan problem where they may be personally liable for deficiencies.  In California, under purchase money mortgage, if the homeowners surrender their home, they will not owe a deficiency because the mortgage is non-recourse debt in California.  The creditors would only be entitled to whatever money they get from seizing and selling the home. Homeowners, that chose this option should consult with a real estate attorney to determine the type of loan they have.

Option 3 – Short sell the home

If the homeowners wants to minimize the effects a foreclosure has on their credit, they can do a short sale.  If they do a short sale, they must obtain from the creditors, in writing, that they will forgive the deficiency.

Tax Implications

Remember, if the homeowners get any type of debt forgiveness, there may be tax consequences. Homeowners should always consult with a tax professional  to determine the tax consequences.