What Happens to a HELOC After a Foreclosure?

Your responsibility to pay your HELOC doesn't vanish after foreclosure.

Your responsibility to pay your HELOC doesn't vanish after foreclosure.

A home equity line of credit, or “HELOC,” is a form of second mortgage that gives you a line of credit based upon the equity you carry in your home. After foreclosure, the equity you enjoyed in your property disappears along with your ability to make new purchases using your line of credit. This does not, however, exonerate you from your responsibility to repay any amount you previously charged using your HELOC.


The very fact that you had equity in your home can prevent you from further legal consequences from your HELOC lender after losing your home to foreclosure. According to Texas A&M University, after foreclosure, your primary lender will sell your home and use the proceeds to pay off the amount due on your primary mortgage loan. Any other proceeds will be distributed to secondary lien holders, such as your HELOC lender, in the order those lien holders recorded their claims against your property. If you have enough equity in your home, the foreclosure sale will pay off the outstanding balance due on your HELOC.


In many cases, mortgage lenders sell foreclosure homes for less than fair market value merely to remove them from the bank’s accounting ledger. This can result in a mortgage deficiency. When a mortgage deficiency occurs, the original lender collects less through the home sale than the balance of the primary home loan. Thus, none of the proceeds are distributed to the second mortgage lender. The second mortgage lender may then take legal action against you for the amount you still owe on your HELOC.


In non-recourse states, such as California, primary mortgage lenders cannot sue consumers for any deficiency left over after the sale of their former homes. Unfortunately, this law does not apply to second mortgage lenders. After the primary lender repossesses the home, the lien the second mortgage lender held ceases to exist--leaving the HELOC balance an unsecured debt. The second mortgage lender may then file suit against the former homeowner for the balance.


If you continue making payments on your HELOC following the foreclosure of your home, your HELOC lender may not pursue legal recovery action against you. Given the fact that filing a lawsuit against you to recover the money you owe costs the lender additional money and resources, its in the lender’s best interests to allow you to continue making payments if you are able to do so. The lower the balance you owe on your HELOC, the less likely your lender is to sue you if you continue to make regular payments.


Filing for bankruptcy after the foreclosure process is complete is one way of avoiding your obligation to repay the balance you owe on your HELOC. Bankruptcy’s automatic stay, which goes into immediate effect after you file, protects you from legal recovery action from any creditor. Because the HELOC debt becomes an unsecured debt, then depending on your circumstances and the type of bankruptcy, the bankruptcy court can discharge it and you will no longer be liable for the balance.

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