Jim Devine writes: >> question: what happens if the borrower _just can't pay_? If the >> borrower owes $100k but does not have the resources. are his or her >> wages garnisheed?
To simplify: 1. Debtor borrows $500k to buy $500k house and grants lender mortgage on house. Debtor stops paying mortgage. Lender has right to declare default and foreclose mortgage, meaning lender sells house and applies proceeds to loan balance. As previously stated, in California, unless lender actually files a lawsuit against the borrower (judicial foreclosure), lender cannot sue the Debtor for the deficiency if the foreclosure proceeds are less than the loan balance. The deficiency is essentially written off and discharged. The only consequence for the Debtor is a bad credit rating. This explains in part why marginal borrowers are so willing to take subprime loans. They benefit from all appreciation, but if they default, all they have really lost is the marginal amount the mortgage exceeds what a rent payment would have been (plus the bad credit rating, but their rating was not so good in the first place, so no big deal).. 2. Debtor borrows $500k, which is not secured by a mortgage or any other security. In other words, an unsecured loan. If Debtor defaults, lender can sue. If lender gets a judgment, the judgment can be turned into a judicial lien against Debtor's assets, including wages (garnishment). However, Debtor can file bankruptcy. If Debtor filed chapter 7, a trustee liquidates all non-exempt assets and distributes to creditors, and all debts (including the $500k) are discharged, so all future assets and wages are free of old creditor claims. The overwhelming number of people who file chapter 7 do not have any non-exempt assets. David Shemano
