In a word, yes. Filing for bankruptcy allows the opportunity to surrender cars and real estate with no continuing obligation. North Carolina hasn’t been as hard hit as other states in the current housing crisis, however, I still meet with clients all the time who owe more than their homes are worth and can’t find a way out. The interest rate on the note has increased making payments unaffordable, banks refuse to modify mortgages after months of “review” and a short sale is far from certain (again requiring lender approval). Even a foreclosure doesn’t provide closure for the underwater homeowner. If your bank auctions your home in a foreclosure sale, you will likely end up owing the difference between the sale price of the home and the amount of your mortgage…….personally. This debt will be a function of state law, but be aware that in this current climate, some lenders have been aggressive in enforcing deficiency judgments. Even if your lender is willing to waive the deficiency judgment or eat some of the note in a short sale, tax consequences will follow. The IRS treats forgiven debt as income and taxes accordingly. If you are “lucky” enough to get $100,000 of debt written off, for tax purposes your annual salary just went up by the same amount.

Enter bankruptcy. Bankruptcy is never the first option for anyone, however, it does provide the underwater homeowner with the option of surrendering a home and walking away with no deficiency judgment and no tax consequences. A bankruptcy filing wipes away your personal obligation to pay debt, meaning the basis for a deficiency judgment (the personal guarantee on your mortgage) is wiped off the books. Your lender’s only recourse is to take back the collateral for the loan (your home). They cannot come after you for a deficiency judgment. Further, debts discharged in bankruptcy are not taxable events. The bankruptcy will show up on your credit report, but if you’re already delinquent on your mortgage your credit has likely already suffered. If you can no longer afford your home, it may be wise to consult a bankruptcy attorney to discuss your options.

John O’Connor