As troubling it is to lose your house to foreclosure, borrowers may still be on the hook for the deficiency amount. It is the difference of what’s owed on the home loan and what the bank could sell for at an auction. “Deficiency judgments” can hurt ex-homeowners years after they have lost their property.

It can happen to homeowners who have achieved short-sales where the bank had approved selling the home for less than what it was worth.

Vanessa Corey who performed a short-sale on her Fredericksburg, VA home in Apr of 2008 is a genuine illustration. After remodeling her place in 2004, unexpected events which led straight to a sour divorce and the burst of the housing bubble, compelled her to sell her home via a short-sale.

As a realtor, she believed that the difference in the amount owed in the loan was forgiven by the lender. Last Nov, she obtained a letter through her attorney showing that she owed the bank $65 k. She had no choice but to file for bankruptcy as she could not afford to pay the bank.

Numerous banks choose not to make statement about the subject of ‘deficiency judgments’. Corey’s bank, BT&T confessed that they were going after more borrowers with deficiencies.

How Do You Avoid A Deficiency Judgment? It depends on which state the homeowner resides in. Other things include if the borrower has a second mortgage or other liens. It can definitely hurt homeowners if they disregarded the issue altogether.

According to Richard Zaretsky, a certified real estate attorney in West Palm Beach, Fla, once your lender has a judgment on you, they can come after you irrespective of where you live. They can request for your financial records, have your wages garnished and place you in jail if you fail to respond.

Financial firms can legally impose deficiency judgments in more than thirty states with the inclusion Fla, NY and TX states.

In some states such as California and Arizona, they are both considered ‘non-recourse’ or prohibit ‘deficiency judgments’. The other remaining 10 states that prohibit deficiency judgments are Alaska, Iowa, Montana, North Dakota, Oregon, Pennsylvania, South Carolina, Washington and Wisconsin.

Although lenders are willing to forgive the deficiency amount, many borrowers are not aware that they are required to request for a release. To avoid any unforeseen surprises, ensure that your attorney requests the bank to release you of any future obligations.

According to Zaretsky, people should not have a false sense of security thinking that a deficiency judgment will not come back and haunt them. He expects many of the deficiency judgments will be filed over the next few years as many of these accounts were sold at discounts to numerous collection agencies and third parties. These organizations would not have bought these accounts if they were not planning on recouping their initial investments.

Financial institutions or debt collection companies may sit and wait for borrowers to cure themselves from their financial woes before filing for a judgment. Take for instance in Florida state, financial institutions and debt collection companies can wait up to five years to file. Once judgment is received, the organizations will be granted a time span of up to 2 decades to collect the debt with interest.

Financial institutions and debt collection companies can hunt down ex-homeowners in spite of a minor debt. In 2004, Mr. Varno and his spouse achieved a short-sale arrangement with their property after he was laid off from his job. In 2008, to his surprise, the second lien holder demanded 25 K from him. Mr. Varno explained that they had already released the title thus making him not indebted to the 2nd lien holder.

Disappointingly enough, that is far from the truth. Although the title was released, this will not make the debt vanish. As there are differences in state laws, a regular mortgage contract is split into 2 provisions. The first being the collateral exchange where the property is pledged. The 2nd is the contractual guarantee to pay off the loan.

Banks may let go of liens in order to facilitate a short-sale. Doing so does not mean that the banks will also disregard the borrowers’ contractual promise to pay back the debt which are outlined in the promissory documents. Once the property is sold, the secured debt can change into an unsecured debt.

Mr. Zaretsky explained an example about one of his customer who was so happy in achieving a short-sale that he foolishly signed all the documents his property agent gave him. Not knowing what was happening, he had also signed away a statement indicating that he is still owes and acknowledge the debt.

He was clueless about the fact that the bank could convert the statement into a deficiency judgment through the legal courts.

Lenders can also be unreliable. Zaretsky had another client who was willing and financially able to pay off the deficiency but the bank did not bother asking as they reserve the right to pursue the deficiency judgment at a later point.

Property agent Mr. Tolchinsky from Florida, mentioned that banks can sometimes pursue borrowers who abandon their home with the knowledge that they may have money or other assets they can pursue.

Financial institutions may conduct due diligence to see if the home was abandoned due to real reasons of the borrowers’ financial hardship. It this was not the case, the financial institution will come after the borrower for the remaining debt.

If you are unsure, it is recommendable to obtain the services of an attorney to make sure that the debt in the short-sale or deed-in-lieu agreement is negotiated away.

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