Defaulting on Secured vs Unsecured Debts
There is a difference between defaulting on unsecured debts and secured debts. I defaulted on unsecured debts.
First, remember that I’m not a lawyer and I’m not giving legal advice, but if anyone is telling you that you can default on a secured debt and end up keeping the asset, you’re getting bad advice. If the debt was secured they can repossess that asset. They can seize the asset itself and any other assets you may have that would cover the total debt you owe. There is a process they have to follow.
For example, if you default on a car loan they can repossess the car and sell it at auction (read pennies on the dollar). They won’t sell the car for as much as you owe on it so they will sue you for the difference. You can attempt to work out a payment plan with them by appearing in court and presenting your financial situation to the judge to get a payment plan or some other relief the judge orders. You will lose the law suit because you owe the money. The legal term for what the collector now has against you is a judgment.
If you didn’t appear in court they can take further legal action. They will get a writ of garnishment and/or seizure. That means they can garnishee your wages and seize any money in your bank accounts. They can come into your house and take assets until they have enough in value to pay off your debt at sheriff’s sale prices, which amounts to pennies on the dollar. They can take your family heirlooms, the baby’s crib, your furniture and electronics, whatever they decide until they have enough to cover what you owe. You can’t stop them or you will be arrested and put in jail. They bring the sheriff with them in case you cause any trouble.
I don’t know much about foreclosures on a first mortgage beyond what I’ve heard and read, but I know they take your house and sue you for the difference between what they sell it for and what you owe. They don’t usually come in and take your personal assets but they can.
If you default on a second mortgage, either a home equity loan or line of credit, they usually don’t want the house, they want their money. Defaulting on a second mortgage will usually get you sued and your wages garnisheed unless you can work out a payment plan in court or with the creditor before they file for a writ of garnishment. You will very likely end up with payments or a settlement for a second mortgage default, unless it’s for most of the value of the property.
Dealing with Repossessions and Foreclosures
There are ways to deal with repossessions and foreclosures. You can file for bankruptcy protection and get the repossessions and foreclosures under it so the debt is settled. You lose the assets but they can’t come after you for the differences you would owe outside of Chapter 7 bankruptcy. If you file a Chapter 13 bankruptcy, these debts will be a part of the total debt settlement agreement the court makes with you. After paying off the Chapter 13 bankruptcy (5 years), you no longer owe any of the debts that were discharged.
If You’re Not Bankrupt
If you’re behind on a car payment:
- catch it up and keep it current while you –>
- sell the car yourself before they repossess it. You’ll get more for it and may be able to finance the difference with a local small bank or credit union. Since the difference between what you owe and what you sold the car for will be much smaller, it’s less likely that they will try to seize your assets.
- work out a payment plan in which they don’t sue you and garnishee you wages or seize your assets
- get sued and have your wages garnisheed. If they sue you, you can appear in court and present your total financial situation to the judge, even though you will lose the suit, and the judge will set the payment terms.
- come up with the cash yourself. It would be better to take a cash advance on a credit card to pay these sharks off than to allow them to continue to harass you.
- If you don’t appear in court and work something out or pay the debt, expect further legal action that you won’t like including writs of garnishment and seizure
It’s in your best interest to make one or more of the less distressful options work for you than to allow the finance company to continue taking legal action against you.
If you’re behind on your mortgage payments you can do the following:
- work out a catch-up plan with the mortgage company (get the agreement in writing)
- sell your house for the amount you owe on it and pay off the mortgage(s)
- do a short sale without recourse (the price you get is less than what you owe on the house but the bank agrees in writing not to come after you for the difference)
- do a short sale with recourse (you have to pay the difference somehow and the bank will likely sue you)
- do a deed in lieu of foreclosure where you give the house back to the bank (with or without recourse)
- as a last resort, the bank forecloses on your mortgage
You have a lot of options when you’re facing foreclosure, and foreclosure is your last resort if you can’t make any of the other options work for you.
Banks and mortgage companies will work with you on other options if you’re persistent, have a written plan or actual offers to present to them, and you sit down with someone at the bank or mortgage company face-to-face who has the authority to make a deal with you and put it in writing.
The bank really doesn’t want your house. If they end up with your house then they have to sell it. Foreclosure sales are usually by auction at the court house directly after a set of properties are foreclosed on. The bank or mortgage company will then sue you for the difference between the auction sale price and what you owe. They will win the judgment and can take further legal action to garnishee wages and seize money and other assets. Again, it’s in your best interest to work something out before a foreclosure happens.
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