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I was recently approached by a past client who was experiencing financial difficulties due to the economic downturn and was just four days from foreclosure on his home. Like many people, he was not in this position because of anything he had done wrong and did not act sooner because he continued to believe he could rectify the situation on his own.

Things fortunately fell into place right away and within two days I was able to postpone the auction date by 45 days and received an approval for a short sale in less than one week (another story). The interesting part of this story has to do with a clause contained in the approval letter stating that the lender reserved the right to pursue the borrower for any deficiency in the loan, meaning that they could come after my client for (in this case) almost $400,000 at some future date (this was the difference between what he owed and what the bank would receive from the short sale).

Knowing that California is a “Non-recourse” state and that the two loans on this property were what is called “Purchase Money,” meaning the original loan taken out at the time the home was purchased, I took exception to this clause and requested that the negotiator have the clause removed. She refused and stated that it was the lender’s policy to include the clause in every short sale approval. I explained to her that California was a non-recourse state and that this was a purchase money loan, meaning that there was no “recourse” for the lender to pursue the deficiency.

After debating with her for several minutes and her bringing the conversation to an end, I made one last plea, asking that she check with her attorneys on the matter. She did not agree to do what I asked, nor did she call me back, but two days later I received a new approval letter without the deficiency clause.

There are several morals to this story: 1) Don’t be bullied by the lenders. If this happens to you, you should walk away from your debt with no strings attached; 2) Don’t accept the first thing the lender gives you in writing; There’s often room for negotiations, and; 3) Know your rights and the laws that are there to protect you or use an agent who is familiar with these transactions and can look out for you.