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Zombie Second Mortgages

Oct. 14, 2022

More and more, I come across clients with what I call a Zombie Second Mortgage.  What do I mean by that?  A Zombie Second Mortgage is an old mortgage, typically taken out during the great recession, that still follows the homeowner around years after they have stopped making payments.  Instead of foreclosing on the property, the lender filed a lawsuit, received a money judgment, recorded the judgment, and then never collected on the judgment.  The homeowner has not received a collection call or any other correspondence and thinks that the debt was “charged off” and is no longer an issue: until the homeowner attempts to sell or refinance the property.  Then the old forgotten second mortgage rises from the dead and causes all sorts of problems.  The individual calls frantically, wondering how they can get ride of this old forgotten debt.  Sometimes, there is a solution: the Statute of Limitations (“SOL”) rides to the rescue.  I refer to it as the SOL, because it means the lender is shit out of luck.    

A Statute of Limitations is a statute the limits the time a party has to bring certain types of legal actions.  SOL’s vary by state, so research your jurisdiction. Under Arizona law, the Statute of Limitations applicable to a promissory note/deed of trust is six years.  Pursuant to A.R.S. § 12-548(A)(1) an action for debt shall be commenced and prosecuted within six years after the cause of action accrues, and not afterword, for a written contract.  A promissory note and deed of trust are considered written contracts.  

In Arizona, you must meet a very specific set of circumstances to use the Statute of Limitations to get rid of an old second mortgage.  The mortgage company or lender must take an affirmative action to accelerate the debt owed under the second mortgage.  In most circumstances, this affirmative act is the filing of a lawsuit to demand immediate payment of the full amount of the debt owed under the note and deed of trust: this is different from a foreclosure.  By filing the lawsuit, the lender is seeking a money judgment for the full amount of the debt rather than taking back the property.  Lawsuits were generally filed during the great recession when the holder of a second mortgage wanted to collect on the debt but did not want to take the property back because it was underwater: more was owed on the first mortgage than the home was worth.  The filing of the lawsuit and entry of a money judgment allowed the creditor to pursue wage garnishment and other collection alternatives to foreclosure; however, many lenders did not pursue collections, or the homeowner filed a bankruptcy discharging the debt owed under the money judgment.  The homeowner stayed in the home, kept making the mortgage payments under the first mortgage, and forgot about the second mortgage because no collection attempts were made, and they stopped receiving statements. 

The filing of the lawsuit started the clock ticking on the Statute of Limitations.  When the lender filed the lawsuit and received a money judgment, the lender only had 6 years to foreclose on the property.  If the lender did not foreclose, the note and deed of trust are no longer enforceable.  The six-year statute of limitations under A.R.S. § 12-548(A)(1) does not affect the money judgment, but that is a separate issue.  If over six years have passed since the filing of a lawsuit on a second mortgage, you can demand that the lender release the deed of trust under A.R.S. § 12-1103(B), because an unenforceable deed of trust is a cloud on the title to the property. 

If the lender releases the deed of trust, there is no longer a second mortgage attached to the property; however, the money judgment is likely still valid and attaches to the property under Arizona law.  You may ask, well then what is the point?  I still have a judgment attached to my property that a title company will require me to pay if I want to sell my home.  The difference is the nature of the second mortgage and the money judgment and how they are treated in a bankruptcy.  The second mortgage is a consensual lien, and the money judgment is a non-consensual lien.  In a Chapter 7 Bankruptcy, you can not remove a consensual lien like a second mortgage/deed of trust from the property; however, you can avoid or remove a non-consensual lien in a Chapter 7 Bankruptcy.  Section 522(f) of the bankruptcy code allows the removal or avoidance of a judicial lien (a judgment from a lawsuit is a judicial lien and is a non-consensual lien) from your home if it impairs your homestead exemption.  Basically, a non-consensual judgment lien impairs your Arizona homestead exemption to the extent that it prevents you from having $250,000 of equity in your home after the satisfaction of the first mortgage.  The actual calculation is a bit more complex and nuanced. 

If it has been more than six years since the filing of a lawsuit to collect the balance owed under your second mortgage or the last payment due under the terms of the note and deed of trust was due more than six years ago, you might be able to get the mortgage released due to the expiration of the statute of limitations.  You should get the mortgage released prior to filing a bankruptcy and attempting to avoid the judgment lien. 

If you have an old Zombie Second Mortgage following you around, call Treguboff Law, PLC for help in determining if you can force the lender to release the mortgage by using the Statute of Limitations.