Legal Question in Real Estate Law in California

Re: Heloc after foreclosure

Proceeds of a foreclosure sale are used to pay the expenses of the foreclosure, certain taxes, and then the deed of trust liens against the property, in order of priority (seniority). When, as usual these days, the sale doesn't produce enough cash proceeds to pay all the creditors, the ones that are unpaid lose their security (collateral) and become general creditors of the borrower.

I should make one other little correction that may help you understand better. A foreclosure is a sale. What you mean is that your former house hasn't been REsold. You owned it before the foreclosure, and if the lender were the high bidder, or the only bidder, at the foreclosure sale, it would become the owner at that point.

At the foreclosure sale, the lender can bid with what it is owed; all others must bid cash.

OK, back to the HELOC. Assuming that the HELOC was not taken out for purchase money, and that it is junior in priority to the loan that was foreclosed, it is no longer a HELOC; it is just an unsecured debt of the borrower, and the lender can sue the borrower just like on any loan, promissory note, credit card or other debt. It does not disappear, and under the presumed facts here, it is not protected from a creditor's suit.

As I see it, there are two possible legal theories where the HELOC lender could not sue.....one is if the HELOC was used as purchase money, which is I think very unlikely. Or, perhaps the HELOC was from the same lender which just foreclosed in November, in which case it could be argued that it is responsible for its own loss of collateral and therefore is not allowed to sue. If you think such a defense might apply, please contact me directly so I can ask more questions about the facts.