It's bad enough that you can't pay your mortgage and have to go through foreclosure or a short sale. But it could get worse than that if you're not careful. The Ellis family, for example, went through a traumatic foreclosure and moved their family out of the home they had lived in for ten years. They had a first and second mortgage and couldn't make the payments after losing their jobs. The home was sold, the holder of the first mortgage was paid off, and the family was told the second mortgage would be forgiven. And eventually Mr. and Mrs. Ellis found new jobs. The foreclosure was done; now they could start over. Right?

Wrong.

Someone at the first bank lied to them--probably because it wasn't going to lose anything and just wanted to get the deal done. The second mortgage holder never agreed to forgive anything. Unless you have an agreement from both banks explicitly stating that the debt will be forgiven (have it reviewed by an attorney to make sure there are no "weasel words"), you have air. And air doesn't pay the bills.

Workout departments at banks aren't there to serve you and make you happy. Their purpose is to extract as much money as they can get from you. And banks don't willingly leave money on the table. Most of them will want to be paid in full or will want you to commit to repaying whatever deficiency remains after your property is sold. Borrowers who neglected to get a complete walkaway in writing have found that bankruptcy was the only way of escaping deficiency demands from mortgage holders.

Same thing goes for a short sale. Just because the first bank agrees to a short sale or foreclosure doesn't mean the second bank isn't going to come after you with torches blazing and hounds baying. NEVER assume anything is written off (from ANY lienholder) unless you get a formal, signed, written, unconditional release of lien and/or judgment from the lender specifically stating that no further action to collect this debt will be taken.