Is it ever sensible to walk away from a property deeply underwater?

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Is it ever sensible to walk away from a property deeply underwater?

A second home, purchased 6 years ago, is currently $110K underwater. Now a recent cancer survivor, I can’t keep up the payments anymore and the bank won’t lower payments or principal. What must I do to protect the first home (a rental property w/ $110K equity) if I decide to walk away from the condo? I’ve held on about as long as I can.

Asked on June 4, 2012 under Real Estate Law, Virginia

Answers:

SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 9 years ago | Contributor

Your state allows deficiency judgments. That means that if a property is foreclosed upon which is worth less than the outstanding balance of the mortgage or HELOC, the lender can sell the home (e.g. at a foreclosure auction or sale), apply the proceeds to the outstanding balance, then sue the homeowner for the rest. That means that if you walk away from this home and it's $110k underwater, your lender could sue you for $110k; assuming it wins (which is a good assumption) and gets a judgment against you, if you don't pay that judgment, it could put a lien on your other home--or garnish your income, or execute on personal property (like vehicles), or levy on a  bank account.

If you are this deeply underwater, you may want to file bankruptcy. Bankruptcy could allow you to give up the home while also protecting you from the outstanding balance of the debt. You should consult with a bankruptcy attorney about your situation in detail, to confirm whether this is the right option for you, and also which type of bankrutpcy (e.g. ch. 7 or ch. 13) would be best.


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