Can I walk away from the home I included in my Chapter 7 years ago or do I have to sell the house?

I was discharged 7 years ago and my home was included. I now want to purchase a new home but need to get rid of the home that was included in the bankruptcy. I have been living in this home since the bankruptcy and making payments but the homes value is not worth what I owe on it. What are my options to purchase a new home and get rid of this one quick?

Asked on April 2, 2016 under Real Estate Law, Missouri

Answers:

SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 4 years ago | Contributor

1) Walking away from it will not discharge your obligation on the mortgage; since you kept paying post bankruptcy, you reaffirmed the debt and are obligated on it. This will not help you: even if the bank forecloses, the loan will still be on your credit and you will have to pay any balance not paid off when they sell the home in foreclosure.
2) The only way to get this off your credit and to have lenders not consider it in deciding whether or not to lend to you is to pay the mortgage off (including by, for example, selling it for whatever you can get, applying the proceeds the mortgage, then paying the balance yourself).
3) You can apply to your lender for a "short sale"--see if they will agree to let you sell the house for less than the current principle balance *and* accept the proceeds as payment in full of the debt. If they do this, it will take care of the loan. They don't need to agree to do this, but might, since it will get them a large portion of the money right away and avoid the risk you will default and leave them with home worth less than the loan.
4) Even if the home is worth less than the mortgage, if your monthly payments are equal to or less than what it would cost rent comparable space, you could look at this as you getting a good place to live and, in the future, will likely get some equity out of it, too (eventually, the loan will be paid down enough, and/or the market will rise enough, that you can sell and make some money).


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