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Related topics: homes, home financing, foreclosure, mortgage, Liz Weston

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."