Rental foreclosure different than residential

Q: If you own two homes and one goes into foreclosure, can the bank levy your account for the delinquent debt? If so, should you file for bankruptcy on one house instead of allowing the bank to foreclose?

A: You must be very careful when you allow a rental property to go into foreclosure. Most states do not protect the property owner from deficiency balances that take place after the rental property is sold or foreclosed on. A deficiency balance is the amount owed after a property is sold. For example, you owe $200,000 on a mortgage loan and sell the property for $150,000. The deficiency balance is $50,000, which could be your responsibility to pay.

The lender will determine whether it is worth it to sue you for the deficiency balance. That will depend on the state in which you live and the amount of the deficiency.

You should make a good faith effort to modify your mortgage loans before foreclosure. Even look into a short sale if the property value is less than what you owe.

Tread carefully with any short-sale agreement. Lenders have strict guidelines before approving one. Credit unions and traditional banks may require that you agree to pay the deficiency balance remaining once the property is sold.

That could be a sizable amount of money and could push you into bankruptcy.

Q: Is your money safe?

A: Money in your bank accounts may be protected. In general, if you have a mortgage loan and checking account with a traditional bank, and you fail to make your mortgage payment, the bank cannot take money directly out of your checking account. The bank must follow the normal procedures of suing you and getting a judgment. Then it needs court approval before taking money directly from your account.

However, you need to be very careful regarding the type of bank account you have with the traditional bank. The type of debt determines your risk. If the debt you have with a bank is considered “business debt,” regardless of whether you have personally guaranteed the debt, then a bank can more easily take money out of personal or business checking accounts. You ought to discuss this with a seasoned bankruptcy attorney because of the significant risk to the money you have in the account.

Credit unions do not have to follow the judgment process and can take money directly out of your checking, savings, money market and possibly your IRA accounts.

The safest approach is to close down all checking, savings and investment accounts when you have delinquent credit accounts.