When your first mortgage goes through foreclosure, your second comes along for the ride. Foreclosure wipes out your first mortgage, your second -- and if you have a third mortgage, that goes away too. This doesn't always wipe out your debt, however: you may end up still owing money that the second-mortgage lender demands that you repay.
When your house sells at foreclosure auction, any property tax and IRS liens on the property get paid off first. Whatever's left goes to your first mortgage holder, to pay the mortgage debt, plus interest, plus the costs of foreclosure. Only when those are paid off does the second mortgage lender get a cut. This is why second mortgage lenders usually don't initiate foreclosure. Even if the second mortgage lender files the lawsuit, there's no guarantee it'll see any money -- and often it does not.
Often, foreclosure sales don't even yield enough for the first mortgage lender to get fully paid off. As foreclosure doesn't discharge the unpaid mortgage debt, first- and second-mortgage lenders can often sue you for what you still owe, depending on where you live. A number of states, such as Minnesota and California, offer homeowners protection against lawsuits over a deficiency on your first mortgage, but not your second. Therefore, if your second mortgage lender thinks it's possible to squeeze the money out of you, you may end up in court.
Just because your lender has the right to sue doesn't make it inevitable. Going to court costs money, so lenders look at what they believe they can get from you and whether it's worth the expense. If the debt is small, or you're completely broke, the lender may throw in the towel. In other cases, you may be able to negotiate your way out. If you offer to pay off some of the debt, your lender may decide to take what he can get without paying for a lawyer.
If your lender is determined to go to court and get her money, filing bankruptcy can stop her cold. When you own a home, bankruptcy provides only limited help: you can't stop paying your mortgage without giving up the house. Once your house is gone, however, the second mortgage is unsecured --- it isn't attached to property. Bankruptcy wipes out unsecured debts although depending on your circumstances and the type of bankruptcy you file, you may have to make a partial payment before the rest is wiped out.
A Durham, NC resident, Fraser has written about law, starting a business, balancing your budget and fighting evictions, among other legal and financial topics.