You may have heard stories of underwater homeowners walking away from their homes and allowing the banks to foreclose on them without a contest. This might not sound so awful if you think you have no hope of catching up on mortgage payments, but it’s a very bad idea for multiple reasons.
(1) Until the foreclosure is complete, you are still the legal owner of the property. That means you can be held responsible for anything that occurs there, like accidents that injure people. You are also still obligated to maintain homeowner’s insurance on the premises, and you will be liable for any fees or even taxes, which might be difficult to discharge in a later bankruptcy.
(2) You can also be charged for any damage that occurs to the house before it’s sold while you’re not there. Even if you take photos of the home before you leave, it’s not going to be worth the hassle to argue over whether some kind of damage happened at all or if you should be responsible.
(3) As a practical matter, the mortgage deficiency will probably be smaller if you short-sell the house yourself. If the bank cancels the deficiency, the tax burden might be lower than if the bank sells it in an auction.
(4) The worst case scenario isn’t necessarily a foreclosure, which you’d be expecting. It’s what happens if the bank chooses not to repossess the home. At that point, the fines will pile up, or worse, you might find yourself in the awkward situation of finding out that someone else sold or rented your home without your authorization. This happened to a man in Los Angeles a few years ago. He had to not only remove the trespassing tenant from the condo but also pay down a large amount in condominium fees.
There are better options than walking away from an underwater home. Examples include short-selling the house to another party with the lender’s blessing (and possibly canceling the deficiency), or if buyers aren’t interested, offering the deed to the bank in lieu of foreclosure. It’s also better to consider filing bankruptcy. It might be possible to strip the lien from an underwater junior mortgage, and a chapter 13 filing can help you stay in your home. A chapter 7 bankruptcy after a short sale can discharge a mortgage deficiency without any tax penalty.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.