So you lose your home to Foreclosure and you feel that your biggest financial problem is behind you. What you may not know is that you might still be liable for the difference between what you owe on the house and for what the bank could sell it for.  This is known as a “deficiency” and many lenders are pursuing any means possible to collect this debt even if the bank approved them selling their home for less than it was worth (Short Sale).

After a property is foreclosed by a bank there is usually a large deficiency. Because of the rise in Foreclosures Banks are seeking means to collect on these huge losses by seeking more deficiency judgments against past owners.  Many past owners are under the impression that they do not owe anything back to these banks and have even signed documents that appear to release them from the debt of the loan.

There are 2 parts to mortgage: a pledge of collateral which is the home and a promise to pay off the loan. If a property is foreclosed, the Lenders will release property liens and pay off taxes in order to liquidate a foreclosure or to facilitate a short sale. Unless the borrower has the bank release the promissory note to pay off the loan, the bank can then convert the secured debt to an unsecure debt and seek a judgment against the borrower at a later date.

It should be noted that banks are selling these accounts to collection agencies. These agencies would not be paying for these accounts if they didn’t have a plan to go after past borrowers. It is not uncommon for these collectors to wait for the borrower to have recovered financially and then go after them for the bad debt. If Florida the bank can wait up to 5 years before they file a claim. Once the court grants the judgment, the bank has 20 years to collect the debt along with interest.

A borrower should always seek legal advice if they are not sure about the foreclosure process or Short Sale process. An attorney will always try to negotiate away any deficiencies when they facilitate a short sale or deeds-in-lieu. An uninformed borrower might find themselves with a ticking time bomb if they sign every document from the Bank without knowing what they are signing.