Enquiring minds want to know: if the bank takes back my house, can it also empty my bank accounts? If I walk away from my home loan, will a lender come running after me? Opinions on the Web vary widely, probably depending on whose axe the writer is grinding. Pro-lender bloggers say that walking away will trash your credit and claim that lenders will pursue you to the grave if they can't recover what you owe them in a foreclosure sale. Walking away also gives you bad breath, insomnia, and makes people look at you funny.

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Those in favor of walking away (who may also be in the business of helping you unload your home and your lender) counter that lenders don't sue to recover deficiencies and that you can ditch your digs with no repercussions. They also urge you to yell neener-neener-neener and thumb your nose when you run off into the sunset. But do you really want to give it a try and then find out the bloggers were wrong? Didn't think so. Here are the facts about deficiency judgments: who gets chased down by lenders and who doesn't.

If you live in a non-recourse state, you are protected from deficiency judgments by law.

That means that returning the home to the lender fully satisfies the outstanding loan, even if the property is worth less than the mortgage balance. If you live in a non-recourse state and owe more than your home is worth, you have extra leverage when negotiating a short sale, deed-in-lieu of foreclosure, or mortgage modification. That's because the lender knows that it will have to be satisfied with the foreclosure sale proceeds and can't get any shortfall from you. It makes foreclosure less attractive as an option.

The specific laws governing the process can be complicated and may vary with the type of loan, but according to the Federal Reserve Bank of Richmond, Alaska, Arizona, California, Iowa, Minnesota, Montana, North Carolina, North Dakota, Oregon, Washington, and Wisconsin can be considered non-recourse states.

Look out for these tricks in both recourse and non-recourse states.

Just because you live in a non-recourse state, don't expect your lender to inform you that you can't be held responsible for a deficiency. When negotiating a short sale or deed-in-lieu of foreclosure, make sure that that you obtain a complete release of liability. Some lenders may try to get you to sign a promissory note as part of the deal. Don't do it; at that point you will have separated the debt from the property and your non-recourse protection could go away. You want a complete walkaway and in non-recourse states there is no reason not to hold out for one. Some borrowers do choose to pay something toward the deficiency in exchange for a more favorable credit history. It's best to have a lawyer go over any offer the lender makes you before signing.

What about those who live in states where lenders can pursue deficiencies?

Living in one of those states doesn't mean that lenders will automatically chase you to the gates of Hell to get every last dime from you. One very very large bank explained its policy in a short sale seminar (press was not officially supposed to be there so I won't mention the name of the institution). The lender looks at a number of things when deciding to play hardball with you or to cut you some slack.

1. Was the mortgage you defaulted on used to purchase the home or did you cash out some equity?

Borrowers having to default on purchase loans or rate-and-term refinances are less likely to be pursued than those who took cash-out refinances to buy boats, take vacations, or play the stock market. Second mortgage lenders in some states can come after you as many as six years after you default and they are likely to do so. You may be broke when the foreclosure sale takes place, but the lender could knock on your door when you have money a few years later. Note: if you used the proceeds of a second mortgage or cash-out refinance for home improvements, you will probably be treated as though the loan was used to buy the home.

2. Is there a true hardship involved?

If you are having problems paying your mortgage, apply for a modification or HAFA (Home Affordable Foreclosure Alternative) short sale. By documenting that you have a hardship, you may be able to save your home. Even if you don't save it, establishing that you have a hardship will likely keep the lender from requiring you to participate in its losses. On the other hand, strategic defaulters -- those who can afford their mortgage payments but walk away by choice -- will not be offered any mercy from lenders and are now being pursued vigorously in court.

3. How long ago was the loan taken out?

The longer you had the mortgage before defaulting, the more favorably your lender will view you. Early payment defaults, or EPDs, are looked upon very harshly, because it appears that you didn't really intend to pay the mortgage when you took it out. EPDs were a major contributor to the foreclosure crisis; many took out stated income or subprime loans for 100% of the home's value, intending to flip the properties (which is why they didn't care that they wouldn't be able to make the payments). When they couldn't find buyers right away, these folks relinquished the homes.

4. Do you have financial resources?

The more money you have, the more likely the lender is to take you to court. How does the lender know if you have money? I don't advise that you lie on your HAFA or HAMP application, because that isn't all lenders look at, and any inconsistencies can get you in hot water. For example, if you state that you have no money to make mortgage payments, the lender may be able to look up your original mortgage application, which probably contains a list of your assets. If you had $300,000 in mutual funds a couple of years ago, someone's going to want to know where it went. Your tax returns will also be requested from the IRS; if you had enough assets to generate significant dividend or interest income, you'll be asked about it (and not necessarily believed). Finally, your credit report will be pulled. If the lender sees that you are paying American Express, Visa, and MasterCard but claim you can't manage your mortgage payment, it is likely to drag you into court and make you prove it.

So, worried about a deficiency judgment? If your mortgage was only taken to purchase the home or refinance to a better interest rate, if it's a few years old, if you can show that you face an economic hardship and have few resources, and if your credit report indicates that you are struggling, you probably have little to fear. But if you took a cash-out refinance four months ago to take a cruise, and decided to walk when your home's value tanked, expect a very rough time from your lender.

The nuclear option

Bankruptcy does allow you to dodge deficiency judgments. If you file under Chapter 7, expect to relinquish your non-exempt assets. If you file under Chapter 13, your mortgage deficiency may be included with the rest of your unsecured debt, and you'll pay as much as the court requires over a three to five year period. Neither option is terrifically helpful unless you actually are insolvent.