Surplus Proceeds 'Recovery Fee' Scam: What HECM Heirs Need to Know

How HECM Foreclosure Surplus Occurs

When a HECM property is foreclosed and sold at auction, the proceeds are applied in priority order: (1) foreclosure costs and fees; (2) the outstanding HECM balance; (3) any junior liens; (4) any remaining surplus goes to the former owner — which in the case of a deceased borrower means the estate or heirs.

In a rising real estate market, surplus proceeds are common. A property with a $300,000 HECM balance might sell at auction for $500,000 — generating $200,000 in surplus proceeds after costs. These funds are deposited with the court and must be actively claimed.

The Clock Is Running

Surplus proceeds claims have strict deadlines — typically 1 year from the sale date in most states, but as short as 30–60 days in some jurisdictions. If the deadline passes unclaimed, the funds typically escheat (transfer) to the state government. Act immediately upon learning of any foreclosure sale.

The Recovery Fee Scam: How It Works

| ContentWhat the Scammer DoesContentThe Truth** | | --- | --- | --- | | Data Mining | Scammer purchases public court records of all recent foreclosure cases, identifies properties with surplus, and looks up potential heirs through obituaries and public records. | All this information is public — the heir can find it themselves for free | | Urgent Letter | Sends official-looking letter: 'Urgent Notice: $147,000 in unclaimed funds owed to the Estate of [Name]. These funds will be forfeited to the state unless claimed by [date].' | The deadline may be fabricated or exaggerated; the 'forfeiture' threat is designed to create panic | | Contract | Agreement assigning 30–50% of recovered funds to the firm as their fee, signed before heirs receive any information about the process. | The actual process of claiming surplus proceeds costs $0–$1,500 in attorney fees — not 30% of $147,000 = $44,100 | | Minimal Work | The 'recovery firm' files a simple 1–2 page motion with the court. This is not complex legal work. | Any competent real estate attorney in the county can file this motion for a flat fee of $500–$2,000 — a tiny fraction of the 30% contingency fee |

How to Claim Surplus Proceeds Yourself (Or at Low Cost)

Step 1: Find Out If Surplus Exists

Contact the court clerk in the county where the foreclosure was filed. Ask: 'Has a foreclosure sale occurred on [property address]? Was there a surplus after the mortgage and costs were paid? Is the surplus being held by the court?' Most court clerks will provide this information freely.

Step 2: Verify the Deadline

Ask the court clerk for the deadline to claim surplus. This varies widely by state: California (1 year); Florida (60 days from court's distribution order); Texas (2 years); New York (ask the court). Do not rely on the deadline stated in a recovery firm's letter — verify directly with the court.

Step 3: Assess Whether You Need an Attorney

In many states, surplus claims are straightforward one-page motions filed with the foreclosure court. Unrepresented parties (pro se) can file these in many jurisdictions. If the amount is large or if there are competing claims (other heirs, junior lienholders), retaining a local real estate attorney at a flat fee of $500–$2,000 is almost always better than a 30–50% contingency fee to a recovery firm.

Step 4: File the Claim

Most courts have a standard 'Motion for Surplus Funds' or 'Claim for Surplus Proceeds' form. File with the court along with: proof of identity; Letters Testamentary or Administrator; death certificate; evidence of relationship to deceased borrower; case number of the foreclosure action.

| ContentSurplus Claim DeadlineContentWhere to File** | | --- | --- | --- | | California | 1 year from sale date (Cal. Civ. Proc. §701.680) | Superior Court where foreclosure was filed | | Florida | 60 days from court's distribution order (F.S. §45.032) | Circuit Court clerk — use Owner's Claim for Mortgage Foreclosure Surplus form | | New York | Determined by court order; act promptly | Court where foreclosure judgment entered | | Texas | 2 years from sale date | District Court in county where property located | | Illinois | Per court order; typically within 6 months | Circuit Court where foreclosure filed | | New Jersey | Per court order | Superior Court Law Division | | All states | Verify directly with court clerk | Foreclosure court in county where property located |

How to Avoid the Recovery Fee Scam

Recovery Fee Scam Protection Checklist

• If you receive any letter about 'unclaimed surplus proceeds': verify the claim DIRECTLY with the court clerk — do not call the number in the letter
• Never sign a contingency fee agreement for surplus recovery without consulting an independent attorney about the actual cost of filing yourself
• Check the deadline yourself — do not rely on the deadline stated by a recovery firm
• Consult a local real estate attorney for a flat-fee quote before agreeing to any percentage-based recovery arrangement
• Report recovery firms that use fraudulent or deceptive tactics to your state Attorney General and the FTC at reportfraud.ftc.gov
• Note: Contingency-based recovery services are legal — they are just typically vastly overpriced relative to the actual complexity of the task