bankruptcy

My Social Security at risk over VA loan?

Justin HarelikDear Bankruptcy Adviser,
I have a Veterans Affairs-secured mortgage on my home. I have recently retired and am living on Social Security money. If I declare a Chapter 7 bankruptcy and walk away from my house, can Uncle Sam garnish any of my retirement income? I have no investments and am living on my Social Security and my wife's Supplemental Security Income disability money. We have no other income.
-- Jeff

Dear Jeff,
You can retire, file bankruptcy and walk away from the house without worrying about any repercussions from the Department of Veterans Affairs, or VA, or Uncle Sam. I don't know of any reason why the government would come after you.

While this might not matter much to you, since you and your wife are on such a limited and fixed income, the VA does not look kindly on anyone who walks away from one of its loans. The agency cannot do anything against you personally, but you would find it very difficult to obtain another mortgage loan through the VA in future.

You ought to contact the VA prior to making this decision. If the mortgage is the only reason you are filing for bankruptcy, you likely could avoid the bankruptcy altogether. The VA has various payment options available, though you would also need to contact the loan servicer. The loan servicer is not the VA itself, but is a public or private entity that collects, monitors and reports loan payments; handles property tax, insurance escrows and late payments; forecloses on defaulted loans; and remits payments on behalf of VA loans.

In many cases, the loan servicer can be difficult to contact. Many people say that reaching a representative to discuss loan workout options can be nearly impossible. The VA has loan technicians in eight regional loan centers and two special servicing centers who actively help veterans communicate with loan servicers.

Here are a few of the options that are available to you if you are willing to make the effort:

  • Special forbearance. You could be given time to get caught up on delinquent payments. Maybe you know you are going to receive a large tax refund that could bring the delinquent payments current. The VA will contact the loan servicer so that it does not begin foreclosure.
  • Loan modification. You may be able to reduce your mortgage payment through a modification of the loan terms.
  • Additional time for a private sale. The property may have a little equity, and you could request a delay in the foreclosure process while you sell the house.
  • Short sale. The loan servicer may agree to let you sell the property for less than what it's worth.
  • Deed in lieu of foreclosure. You voluntarily agree to turn the property over to the servicer instead of going through a lengthy foreclosure process.

Ultimately, you need to decide whether it is easiest to simply notify the lender that you are walking away from your VA loan and move out. Though there's no risk to your Social Security, I just think it's worthwhile to explore your options before making a final decision.

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