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Dear Bankruptcy Adviser,
What are the risks of walking away from a mortgage? My loan payments consume more than 50 percent of my net income, leaving me hardly any money leftover each month. I have virtually no money left in available savings and have chosen to no longer make my mortgage payments and move back from Nevada to California. Please share your advice.
-- Steve
Dear Steve,
Deciding to walk away from a home is an emotionally
charged issue. Lenders are trying to convince
people that walking away is the last option. Members
of Congress are claiming that you have a moral
and ethical obligation to pay back your debt.
And most people believe that you are morally obligated
to do everything possible to pay back your obligations.
In theory, this is a wonderful idea -- pay back
what you owe and live happily ever after.
Unfortunately, you cannot do that which is impossible. Most people trying to save their homes
incur insurmountable debt -- credit cards, payday loans and personal loans. Then, after all personal loan
options have been exhausted, the individual finds it impossible to pay unsecured (credit cards) and secured
(mortgage) debt payments.
Try everything possible prior to walking away from your home and I believe you satisfy your
moral obligation to pay back your debt.
Sell the home
Immediately list the property for sale. Selling the property will protect your credit as much as possible.
Even if you sell the property for less than you owe, at least you will avoid having a foreclosure on your
credit report.
You would need to get lender approval to sell the property for less than the outstanding
balance. This is called a "short sale," in which you sell the property for less than the current balance.
The lender might be willing to accept something rather than write off the entire debt.
Keep in mind that sometimes the lender will not even discuss a short sale until you are
delinquent on the mortgage payments. This is counterintuitive, meaning you have to be delinquent before the
lender will consider this option. However, you may give yourself more time to stay in the property as you
start to move on with your life.
Foreclosures on your credit report will affect your future more than a short sale. At the
very least, you will show future lenders that you made a mistake for purchasing a property that you could
not afford, but you made the effort to correct that problem and did not simply walk away from your obligations.
Future lenders will be less than sympathetic to your request for new credit if you did not make every effort
to protect your former lender.
Negotiate a loan modification with the lender
You may also try to work out a loan modification
with your lender. Again, you typically need to
be delinquent on the mortgage payments for the
lender to work with you. The large mortgage lenders
are so overwhelmed with loan modification requests
that getting someone to talk to you will probably
be the largest challenge you will face. Credit
unions tend to be the easiest to reach as they
have fewer clients and more at stake if you walk
away.
File Chapter 13 bankruptcy
If you have a first and second mortgage on your
property, you have another option -- one that
should be considered with great caution -- to
file Chapter 13 bankruptcy. When you have no equity
in your home and the second mortgage is completely
unsecured, then you may have the right to eliminate
the second mortgage completely while paying monthly
on the first mortgage only.
Make every effort possible to protect
your credit and sell your property without walking
away. If you first explore all your options, then
you can sleep better knowing you tried the best
you could. The housing market is in turmoil right
now and options are limited. Once you try your
best to satisfy your obligation, then it may be
time to consider the final option -- walk away.
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