You’ve gone through the process of bankruptcy, painful as that is, and have discharged all or most of your debts. You’re back on track to rebuilding your credit, and are trying to be more responsible with your money, and put it to better use.
In many cases, you are still living in your home after bankruptcy. You’re making payments and trying to keep up with expenses. But, as you’re creating a new budget and considering what’s best financially, you may decide homeownership is not the best decision right now.
The question you may ask yourself then is, “What would happen if I walked away from my house?” The answer will depend on a few things, but primarily on the terms of your bankruptcy. Specifically, whether you reaffirmed your mortgage.
Did You Reaffirm Your Mortgage?
When you are negotiating the terms of your bankruptcy, dealing with your mortgage is going to be a big issue. Not only is it a large amount of money, but the decision you make will also determine your living situation.
If you reaffirm your mortgage, you essentially agree to keep the debt and not have it discharged in bankruptcy. This has the advantage that, if you can continue making payments for the life of the loan, offers a relatively simple way to improve your credit score.
Most people, however, will not reaffirm their mortgage. This means that the debt is discharged, but they do not necessarily have to leave their home. As long as they continue making payments, they can stay in their house. If you’re less certain of your ability to make payments, this is a better choice.
Banks usually agree to this, as it means they are getting at least some of their money back. Foreclosures are expensive. Banks are not in the real estate business, and they will usually just try to sell the property as quickly as possible, taking a loss.
If you have not reaffirmed your mortgage, if you stop paying and walk away from the home, the foreclosure will not show up on your credit report. If it does, you have the legal right to dispute that charge and get it removed.
If, however, you did reaffirm your mortgage, you are still responsible for the debt. Walking away from the property means that the bank can report you to credit agencies for non-payment.
What About Future Loans?
There are guidelines, set by Fannie Mae, that determine how long after a foreclosure you have to wait before you can successfully qualify for a new home loan. Home loan lenders follow these guidelines, and it is one of the criteria you have to meet to successfully apply for a loan.
Until recently, that period was measured from foreclosure, no matter what other circumstances there may have been. Fannie Mae clarified those guidelines, however, and now say that that period can be measured from the date of the bankruptcy, not the foreclosure. That means that walking away from your home may not lengthen the time you have to wait before applying for another home loan.
What Happens to the Property?
There is an important caveat to understand, however. While walking away from your home may not affect your credit, or at least not directly, you are still the legal owner of the property. Your name is still on the deed, and so on paper the home is still yours. This is true until the bank goes through the process of foreclosure.
This process may take as long as two years. For the whole of that time, you, as the owner, are responsible for property taxes, utilities, and maintenance, even if you are no longer living in the home. These costs will add up and, if gone unpaid, will end up right back on your credit report. Many of these costs are not dischargeable in bankruptcy, as well.
In some cases, banks have even decided not to go through with bankruptcy, as the cost of keeping and maintaining the house may exceed any money they may get through a sale. If that happens, they release any claim to the property, and it returns to the owners, free and clear. However, this is rare and usually happens in low-value neighborhoods.
It is possible to surrender your home to the bank without it going through the process of foreclosure. This is called a deed in lieu of foreclosure, and it means the bank has become the legal owner of the property. If you do not go through this process, it is important to understand that there is a possibility you will still own the property.
While it may seem like the best option is simply to walk away, you are almost always better served by keeping in contact with your lender and discussing options with them. They will act in their interests. However, they have many options, and it is important to understand how their decisions affect you. Talking with your lender and a lawyer is the surest way to decide the best course of action.