Home equity loans or lines of credit, are basically second mortgages that give you a line of credit based upon equity you carry in your home. After foreclosure, the equity in your property disappears as does your ability to make new purchases using your line of credit. Furthermore, you're still responsible to repay any amount you previously charged using your equity loan or line of credit.
Posted on Feb 19, 2014
Now, equity in your home can prevent further legal consequences from your 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 money from the sale to pay off the amount due on your primary mortgage. All other proceeds would then be distributed to secondary lien holders, 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 home equity loan or line of credit.
Your secondary lender may not pursue legal recovery action against you if you're able to continue making payments on your home equity loan or line of credit following the foreclosure of your home. It's in the lender’s best interests to allow you to continue making payments if you are able to. Keep in mind, filing a lawsuit against you to recover the money you owe costs the lender additional money and resources. The less you owe on your home equity loan or line of credit, the less likely your lender is to sue. This is especially true you if you continue to make regular payments.
If you can't afford or continue to pay off your home equity loan or line of credit, bankruptcy can be an option after the foreclosure process is complete. Filling for Bankruptcy will dissolve you of any obligation to repay the balance you owe on your home equity loan or line of credit. Bankruptcy enables automatic stay and goes into immediate effect after you file. This protects you from legal recovery action pursued by creditors. The debt becomes an unsecured debt, then depending on your circumstances and the type of bankruptcy, the court can remove your legal obligation to repay the balance.