Large Monthly Mortgage Payments Can Seem Overwhelming When a Home Has Dropped in Value and Money is Tight. Is Bankruptcy an Option?
For many homeowners these days, the monthly mortgage payment is almost more than they can handle. Their home’s value has dropped but their mortgage payments have stayed the same or even increased (don’t you just love those adjustable rate mortgages).
In states like Arizona, California, Florida and Nevada, maintaining a mortgage on a home that will likely never recover its pre-recession value seems like throwing good money after bad.
If you are hopelessly underwater on your home and can no longer afford the mortgage, bankruptcy might be an attractive option. Chapter 7 bankruptcy allows you to surrender or walk away from real estate with no continuing liability on the mortgage. This avoids a common scenario that many people fear: the deficiency lawsuit.
Filing bankruptcy on your home will effectively erase your personal guarantee from the note, allowing you to give the bank back your home with no fear of being sued for a deficiency. Contrast this with the common situation in which the bank forecloses and then sues the borrower for a deficiency, coming after the difference between the foreclosure sale price and the mortgage balance plus fees. Be aware however, that even if you surrender your home, the bank will still foreclose after bankruptcy to clear title.
An added bonus: no more albatross mortgage payments.
If you’re considering filing bankruptcy to escape personal liability on a home that you simply can’t afford, meet with an attorney. It will be important to ascertain whether your state law allows for deficiency lawsuits after foreclosure and whether your loan is full recourse. An experienced attorney will be able to guide you through your state’s laws so you can make an informed decision.