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Losing a home to foreclosure or struggling to arrange a short sale is hard enough. But another blow may lie ahead if your lender comes after you for the difference between what you owe and what your home is ultimately worth.

The bill, which can arrive years after a foreclosure or short sale is completed, comes as a big shock to many, said Ike Shulman, a bankruptcy attorney in San Jose, Calif., a co-founder of the National Association of Consumer Bankruptcy Attorneys.

"I see a lot of people who had no idea they'd be stuck with debt" after a short sale or foreclosure, Shulman said. "These aren't small amounts. I had one (client sued) for $175,000."

State laws vary widely. About half of the states have "judicial foreclosure," in which foreclosures happen in court and lenders are allowed to sue borrowers when the proceeds of a foreclosure or short sale don't cover everything that's owed -- a gap known as a deficiency. Other states put restrictions on lenders' ability to pursue such debt, but only North Dakota and Oregon forbid deficiency judgments of any kind.

Image: Liz Pulliam Weston

Liz Weston

Even in states that offer borrowers more protection, however, you could still find a lender coming after you for money.

For example, California is a "nonjudicial foreclosure" state; its courts typically aren't used for foreclosures, and lenders normally aren't allowed to sue homeowners over mortgages used to purchase homes. But the protection is weaker if a homeowner had refinanced a loan and may not exist at all for second mortgages, such as home equity loans or lines of credit, that are taken out after a purchase.

"When you have a second mortgage, the chances are greater that you're going to get sued," said attorney Stephen Elias, the author of a "The Foreclosure Survival Guide: Keep Your House or Walk Away With Money in Your Pocket."

Another way people can be vulnerable is when they're trying to arrange a short sale -- a sale of their home for less than they owe -- and the lender includes a clause in the paperwork that puts the borrower on the hook for some or all of the remaining debt. Alternatively, the paperwork may not mention the remaining debt at all, giving the lender the freedom to pursue it later.

"(Short sellers) could have unknowingly signed up to pay debt that they wouldn't owe in a foreclosure," Shulman said. "There's a lot of misinformation and a lack of information. . . . In many cases, people are flying blind."

Will your lender sue you?

Just the fact that a lender can sue you, however, doesn't mean that it actually will. There aren't any hard figures showing how many lenders are pursuing borrowers for debt, and some say the lawsuit threat is overblown.

Lenders often don't pursue borrowers for deficiency judgments because it's usually not worthwhile economically, said Brent T. White, an associate professor of law at the University of Arizona who wrote a research paper called "Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis."

White believes lenders, politicians and the news media exaggerate the threat to discourage deeply "underwater" borrowers from abandoning their mortgages. (See "Are you foolish to pay your mortgage?")

The costs of lawsuits and the fact that many borrowers can't pay are factors keeping lenders from pursuing more deficiency judgments, agreed Jon Maddux, the CEO of You Walk Away, a site that advises homeowners about foreclosure and strategic default.

Maddux also believes lenders are concerned about bad public relations. Lenders don't want to be seen as "kicking people when they're down," Maddux said. "And people know (big lenders) received bailout money, and they're making profits again."

Those, Maddux said, are among the reasons that only six out of more than 4,000 clients served by You Walk Away have been saddled with deficiency judgments.

"Only six cases in the last three years, and those were primarily people with second mortgages," Maddux said. "That's a very low risk. . . . It's a safe risk to take. I don't think that should deter anyone from strategic default or walking away from a house."

'You can't count on getting lucky'

Shulman disagrees. He's hearing from more people who have been sued, and he believes the pace of lender lawsuits has picked up in the past year.

"I think the banks are getting more serious about going after this debt," Shulman said.

Shulman noted that lenders often have several years to decide whether to pursue a borrower for mortgage debt. He said lawsuits aren't all that expensive to file, especially if the lender finds a lawyer willing to work on contingency -- that is, without being paid upfront. Or the lender could simply sell the unpaid debt to a collection agency.

"I don't think it's something you can predict," Shulman said of the risk of being sued. "If you're vulnerable legally, you can't count on getting lucky."

Maddux agreed that the risk of lawsuits may still exist for his clients.

"It's still too early to tell," Maddux said. "A lot of these lenders have three years, four years or even five years (to make a decision). They may be sitting back, seeing if they want to pursue deficiency judgments."

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If you're about to lose your home, here's what you need to do:

  • Try to relieve yourself of liability in a short sale. Tell your real-estate agent you want a deal in which the lender accepts the home sale proceeds as full settlement of the mortgage, Shulman said. Carefully examine all paperwork to make sure you're not signing a clause that makes you liable for any debt after the sale. If the lender balks, consider whether you might have more protection with a foreclosure. If not, consider negotiating a settlement to reduce what you owe to the lender.
  • Research your state's laws. Attorney Elias compiled a summary of each state's laws for his book that's also posted on publisher Nolo's website. He notes that his list deals only with the most common types of foreclosures in each state and pertains only to single-family residences. Elias provides links to help you do further research, but I'd recommend discussing your situation with a bankruptcy attorney who can assess your vulnerability to lawsuits.
  • Talk to your accountant. If, rather than suing you, your lender agrees to forgive a portion of your debt, the forgiven debt is potentially taxable income to you. The Mortgage Debt Relief Act of 2007 allows many taxpayers to exclude mortgage debt forgiven between 2007 and 2012 from their income, but the law has enough exceptions and limitations that you'll want to discuss your situation with a tax pro.
  • Consider bankruptcy if you're sued. A deficiency judgment can be wiped out in a Chapter 7 liquidation filing, Shulman said, or what you have to pay can be reduced or eliminated in a Chapter 13 repayment plan. A bankruptcy might not be necessary if you have few assets and your income is the type that can't be seized by creditors, such as Social Security payments. In that case, you're considered "judgment-proof," and the lender wouldn't be able to collect on any judgment it gets. But you'll want to run your situation past a bankruptcy attorney, just to be sure.

Liz Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "The 10 Commandments of Money: Survive and Thrive in the New Economy" (find it on Bing). Weston's award-winning columns appear every Monday and Thursday, exclusively on MSN Money. Join the conversation and send in your financial questions on Liz Weston's Facebook fan page.