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COLLECTION OF A SECOND MORTGAGE AFTER THE FIRST MORTGAGE FORECLOSES

This article addresses the hot topic of whether or not a lender that made a second mortgage on a California property can collect that debt after the first mortgage has foreclosed on the property, thereby eliminating the second mortgage lien on the property. This is commonly referred to as a sold out junior lien. This article will address whether or not a sold out junior lien can be collected by the owner/holder of the loan.

Whether or not a sold out junior lien-holder can initiate proceedings to collect the debt is ultimately a complicated legal question. Once the first forecloses, wiping out the lien belonging to the second mortgage loan, that loan essentially becomes an unsecured debt, very similar to a credit card debt. Before that lender can even commence efforts to collect that debt after the foreclosure of the first mortgage, an evaluation needs to be completed to determine whether or not the borrower has any personal liability on the loan. If the borrower does not, the lender cannot take efforts to collect that debt.

There are a variety of considerations that need to be evaluated by a real estate attorney to determine whether or not that debt is still collectable. Whether or not it is collectable depends upon many factors, such as the nature/character of the loan at the time when it was made, when the last payment was made by the borrower, and the final due date of the loan under the terms of the loan, to name a few.

Recently many lenders have attempted to collect sold out junior loans which are legally uncollectable debts. If you are a borrower in this situation, you should not assume that you owe this debt. Likewise if you are a private lender, you should also not assume that you can collect a debt. The borrower or private lender should first consult with an attorney and have an attorney evaluate whether the debt is collectable. If you are a lender and you collect on an uncollectable debt, you may become liable for collection of an uncollectable debt.

I represent clients, both borrowers and lenders, regarding sold out junior loans, throughout the Bay Area, and in the East Bay, California, in Oakland, California, and in Walnut Creek, California. If you have questions, or need representation by a California real estate attorney involving a sold out junior lien, please feel free to contact me to discuss your case or to arrange for a consultation. I can be reached at (510) 465-0025 or (925) 708-3306.

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