Realizing that you can no longer pay for your home means that you have difficult decisions to make. While modification and even lien stripping in bankruptcy may be options for some, if you truly cannot afford to keep your home, you must decide on the best way to walk away.
Do Nothing
If you do not pay your mortgage payment, the lien holder will foreclose on your property. Although not paying your mortgage payment and the resulting foreclosure will significantly harm your credit rating, the home finance industry is presently in such turmoil that it may be months to more than a year before the lien holder forecloses on your property. During this time you live rent free and can save for the future. Note that if you do not maintain insurance and do not pay real estate taxes, the foreclosure timeline will likely accelerate. Also note that under the Mortgage Forgiveness Debt Relief Act, which extends through 2012, income normally attributable by the IRS in connection with a foreclosure is not taxable, although you may be liable for a deficiency balance when the home is sold for less than you owe. A foreclosure is listed as a public record on your credit report and the late payments are also reported.
Deed in Lieu of Foreclosure
Some financial “experts” have advised distressed homeowners to “just walk away.” Walking away from a home is easier said than done, since you still own the home and are legally responsible for the property in a variety of ways. One way to legally “walk away” is to transfer title of the property via a Deed in Lieu of Foreclosure. Now the lien holder owns the property, which may sound pretty good until the property is sold for less than you owe, triggering a deficiency balance. You may also end up owing taxes on the difference.
Short Sale
A Short Sale is a sale for less than what is owed by the seller. A lender will sometimes agree to allow the property to be sold for less than you owe if it is clear that you are unable to continue paying for the property and the home is upside-down. In many cases the Short Sale deficiency is forgiven by the lien holder, but that will depend on the lender and on state law. A Short Sale is identified as a settlement on your credit report and will hurt your score, although not as much as foreclosure or bankruptcy.
Bankruptcy
A bankruptcy is a legal discharge of your debt. It is the cleanest and most powerful option to “walk away” from the home with no contract or tax obligation. A bankruptcy uses the power of federal law to stop further negative credit reporting and collection attempts. In the end your credit report identifies the loan as “Discharged in Bankruptcy” with a “Zero Balance.” The bankruptcy record will stay on your credit report for up to ten years, but by surrendering the property you will avoid a foreclosure on your record.
If you need to walk away from your home and are weighing your options, consult with an experienced bankruptcy attorney and learn how the federal bankruptcy laws can help. Bankruptcy can provide you time to move without foreclosure and without owing money in connection with the home.
Fears & Nachawati Bankruptcy Law Offices
4925 Greenville Ave Suite 715, Dallas, TX 75206 (214) 890-0711
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