Question: Three years ago we owned our Prescott home free and clear of any mortgage. We wanted to move to Mesa, and we borrowed $150,000 on our Prescott home from a bank under a Home Equity Line of Credit (“HELOC”). We used this $150,000 to pay cash for the Mesa home that we purchased. We are trying to sell our Prescott home for $150,000, but our real estate broker says that our Prescott home is now only worth $110,000. We are unsure about Arizona debt collection laws - if we stop paying on the HELOC on our Prescott home, will our bank get a deficiency judgment against us after a foreclosure?
Answer: 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 you stop making payments on the HELOC your bank will probably not foreclose, but will file a collection lawsuit against you for the $150,000 balance on the HELOC. The bank will then get a judgment against you for $150,000, plus legal fees and court costs. The bank can then pursue collection of this judgment by garnishing your wages, attaching your bank accounts, and even executing against your Prescott home. In other words, the bank should be able to collect from you 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.