Behind in Your Mortgage? (Part 2)

14 Jul Behind in Your Mortgage? (Part 2)

In part 1, we discussed what you can do to keep your home. Here, we will look at your choices if you are willing to leave the house.

If you aren’t going to keep the house; you can either sell or abandon it. Selling property in this day and age usually means a short sale – convincing the mortgage company to take less than is owed in order not to have to take the property back in foreclosure. That has proved a workable solution and many lenders will make those arrangements. But, is it worth it to you?

Anyone who has ever sold a house knows how much work it is: keeping the house clean for prospective buyers, filling out paperwork, meeting with realtors, being gone on weekends so it can be shown, etc. And if you do get an offer on then house and get the bank to compromise, you get absolutely nothing back!

The bank and the realtor get some money, but there isn’t anything left for the seller. So, you’ve knocked yourself out for no gain. Of course, your neighbors will appreciate the fact that you just didn’t leave and create another foreclosed home on the street.

There can also be personal income tax implications for a short sale.

Generally, the lender will take what they can get and forget the rest of your obligation. But Bank of America recently enacted a new program to ask sellers in a short sale to agree to repay the difference that the bank is compromising! This language was quietly added to their standard short sale agreement, and hopefully, no other banks will follow suit. So, if your lender is Bank of America (or was Countrywide who was purchased by Bank of America), it’s one more reason to avoid a short sale.

Finally, you can always walk away and the house will be foreclosed. In many states, the holder of the first loan on the property can’t get a deficiency judgment. Thus, if they get the house and sell it for only a fraction of what you owed, you are still in the clear: they can’t come after you. Check with local counsel to see if your state has such anti-deficiency legislation.

Even if the holder of the first deed of trust or mortgage can’t come after you, a second deed of trust or home equity line of credit can, in most instances, pursue you if they have been wiped out by the foreclosure of the home. That needs to be considered in a foreclosure.

Again, you should always check with a good real estate or bankruptcy attorney if you are going this route to protect yourself from any unforeseen consequences.

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Douglas Jacobs is a California bankruptcy attorney and partner in the Chico law firm of Jacobs, Anderson, Potter & Chaplin. Since 1988, Mr. Jacobs has taught Constitutional law and Debtor-Creditor/Bankruptcy law at the Cal Northern School of Law. He has served as Dean of Students since 1994. He is a frequent lecturer on the subject of consumer bankruptcy law, and has spoken at both state and national levels.
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