Unforgiven Debt Balances On Foreclosure, Short Sales Leave Ex-Homeowners Stunned; Failure To Obtain Written Waivers Drive Some Into Bankruptcy Court

In Gainesville, Virginia, The Washington Post reports:

• After the bank foreclosed on Fernando Palacios's home in March, he thought he was done with what he described as the most stressful financial situation of his life. The bank sold the home for far less than Palacios owed on it, as often happens with foreclosures. What Palacios did not see coming was the letter from his lender demanding that he pay the shortfall: $148,064.02.

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• Over the past year, lenders have become much more aggressive in trying to recoup money lost in foreclosures and other distressed sales. In many localities, lenders have the right to pursue borrowers whose homes have sold at a loss to collect the difference between what the property sold for and what the borrower owed on it, also called a deficiency.

• Before the housing bust, when the volume of foreclosures was relatively low, lenders seldom bothered to chase after deficiencies because borrowers had few remaining assets to claim and doing so involved hassles and costs. But with foreclosures soaring, lenders are more determined to get their money back, especially if they suspect borrowers are skipping out on loan they could afford, an increasingly common practice in areas where home values have tanked.

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• To avoid personal liability for the deficiency, Palacios is filing for bankruptcy protection, as many people do who are in similar situations, said Nancy Ryan, his bankruptcy attorney.
  "I am definitely seeing more people come through my door who walked away from houses a year or two ago and thought they were as free as the dead," Ryan said. "They're stunned when they realize they're not."

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• Borrowers should get a waiver in writing from their lenders to protect themselves, said Diane Cipollone, an attorney at the nonprofit Civil Justice. "Nobody should assume the deficiency is forgiven," she said.

For more, see Lenders get aggressive in recouping foreclosure losses.