When Does It Make Sense to Let the House Go?

You’re behind on your mortgage, and a foreclosure is threatened. You speak with a bankruptcy attorney, and are eligible for a Chapter 13, which will let you catch up on the payments and save the house. But should you?

I speak with clients every day in this situation, and one of the most important things I do is to counsel them about whether it makes economic sense for them to save the house or not. (Saving the house for emotional reasons is another story.) Here are three of the factors we look at:

1. Is the house “under water”? If you owe a lot more than the house is worth, you can spend a *lot* of money catching up payments, and at the end you don’t have much to show for it.

For example, one client had a $125,000 mortgage, but the house was worth less than $10,000. If he’d paid the $20,000 in arrearages through the Chapter 13 Plan, he’d still have a house worth $10,000 and a $105,000 mortgage.

The housing market isn’t going to increase the value of his property *that* much, and he won’t be able to sell it. Surrendering the property made the most sense, and he’ll be able to save the $20,000 to use to purchase a new property down the road.

2. If the house is in very poor condition, you may be able to file a Chapter 7 and walk away from it, without having to come up with money for repairs.

3. If you simply don’t have enough money both to resume your monthly mortgage payments *and* pay the Chapter 13 Trustee the required monthly payment, you’re spending money to just delay the inevitable.

Chapter 13’s work best when you are able to make the required payments and have a benefit (such as equity in your house) at the end of the Plan. And if you file a Chapter 7, it’s over sooner and you can begin rebuilding that much quicker.