Homeowner Liable for Deficiency After Foreclosure Debt Collection Laws Say

Three years ago a Prescott home was owned free and clear of any mortgage. The homeowners wanted to move to Mesa, and borrowed $150,000 on the Prescott home from a bank under a Home Equity Line of Credit ("HELOC"). They used this $150,000 to pay cash to purchase a home in Mesa. The Prescott home is for sale for $150,000, but their real estate broker says that the Prescott home is now only worth $110,000. How do Arizona debt collection laws work? It the homeowners stop paying on the HELOC on the Prescott home, will the bank get a deficiency judgment against them after a foreclosure?

Unless a HELOC was used to purchase a home, the bank does not have to foreclose but can sue a homeowner for the amount of the HELOC. Therefore, if the homeowners stop making payments on the HELOC your bank will probably not foreclose, but will file a collection lawsuit against them for the $150,000 balance on the HELOC. The bank will then get a judgment against them for $150,000, plus legal fees and court costs. The bank can then pursue collection of this judgment by garnishing wages, attaching your bank accounts, and even executing against the Prescott home. In other words, the bank should be able to collect from the entire $150,000 judgment, plus legal fees and court costs. If the bank did foreclose on the $150,000 HELOC, under Arizona?s anti-deficiency laws the bank generally would be prohibited from seeking any deficiency judgment. Therefore, HELOC lenders generally will never foreclose on a HELOC, but instead will file a collection lawsuit.

Note: Any mortgage loan, including a HELOC, used to purchase a home is a non-recourse loan, i.e., the homeowner has no personal liability on the mortgage loan either in a collection lawsuit or in a deficiency action after foreclosure. In other words, after default on a purchase money mortgage loan the bank?s only remedy is to foreclose and take the home back.