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Columns: Bankruptcy Adviser
Justin Harelik   Expert: Justin Harelik
Bankruptcy Adviser
Options to explore before walking away from mortgage
Bankruptcy Adviser

Overwhelmed by home debt

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

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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.

Bankrate.com's corrections policy -- Posted: June 10, 2008
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