In the Chicago Tribune recently(see the link above) the writer suggests that the issues facing homeowners who are “underwater” on their house value are whether it is moral to just walk away from a house that they supposedly can afford.
The author mentions this as if it is the only issue facing homeowners. Homeowners have many more problems than whether it is moral to “walk away” from a house that they can afford.
Legally, in Illinois and most other states, it is not so simple to walk away from the house. There are consequences. The first consequence is the remaining liability on the note. So this means that if you owe, for example, $200,000.00 on your home, and you let it go into foreclosure, and the house only sells for $100,000.00, you are still responsible for the remaining $100,000.00 deficiency balance. One way to try to eliminate the liability is to try a “short sale” first. This would require you to get the bank’s approval to take less money. However, if you have a second mortgage, that lender would also have to approve. Even if you do get a short sale approved, that does not mean the lenders would eliminate your responsibility (“forgive the debt”) for the difference. And, if they do give you a forgiveness of debt, they will issue you a 1099 statement to the IRS, so that you may have to include it as income. You would have to consult with a tax professional to determine whether you have to pay taxes on the amount forgiven.
So, the “strategic defaulters” are left with another alternative– Bankruptcy. However, the type of bankruptcy available depends on the “Means test”. If the debtors make too much money, they may not qualify for Chapter 7 Bankruptcy (complete bankruptcy, elimination of debt). The means test allows certain deductions even if the debtor is over the state median. You would need to consult with a qualified bankrutpcy attorney to determine whether you qualify.
If you do not qualify for Chapter 7 Bankruptcy, you would need to file Chapter 13 Bankruptcy, in which you create a plan to pay back your creditors over 5 years. Again, setting up the plan is important, and you should have an experienced consumer bankruptcy attorney create this plan.
In all, it may be necessary or advisable to “walk away” from your home mortgage. However, the consequences are much more complicated than the article makes it appear. Speaking to an experienced bankruptcy attorney should be the first step in your decision-making process.
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