Walking Away From An ‘Upside Down’ Mortgage

Posted on December 18, 2013 at 7:04am by

While many people file a Chapter 13 bankruptcy to save their home from a foreclosure sale, other people file either a Chapter 7 or a Chapter 13 bankruptcy so they can walk away from a piece of property and not pay any more money on it.

Outside of bankruptcy, when a mortgage company forecloses on your home, if there is a balance owed after the mortgage company applies the proceeds of the sale to the loan balance, you are still responsible for that debt. The debt becomes what is known as a deficiency balance. This is commonly referred to as being “upside down” on your mortgage or having an “underwater mortgage.” By filing a bankruptcy, that deficiency balance is included as an unsecured debt. In a Chapter 7 bankruptcy, that debt will be discharged. In a Chapter 13, that debt will be treated as any other unsecured creditor is treated. If you are paying none of your unsecured debts in the Chapter 13 Plan, that debt will be discharged upon completion of your Chapter 13 Plan. If you are paying a certain percentage to each of your unsecured creditors, any portion not paid will be discharged upon completion of your Chapter 13 Plan.

Likewise, if the mortgage company did not foreclose on your home prior to the filing of your bankruptcy, you can still walk away from the home. Sometimes people want to walk away from the home because they no longer live there, they owe more than its worth, the house no longer fits their needs, the house is in disrepair, etc. By surrendering the property in the bankruptcy, it will be treated as an unsecured debt as outlined above.

If you want to surrender the property, you may determine it’s best to stop making the mortgage payment. However, there may still be other obligations in place until your name is taken off the deed by foreclosure or a deed in lieu of foreclosure. You are still responsible for maintaining the property, any injuries that occur on your property, any government fines, any condominium fees, any home owners’ association dues, any storage fees, or any utilities bills that are incurred. Many people opt to remain in the home until their name is removed from the deed to avoid any headaches with respect to these continued obligations. Another reason people opt to stay in the home until their name is removed from the deed is that, in some instances, the mortgage company may move slowly or may decline to foreclose at all, if it does not believe it is in its best interest to foreclose.

In addition, while you are still required to pay the real estate taxes, if you do not want the property any longer, you can stop paying those real estate taxes and wait for the county to sell the property at a tax sale. If you do not pay your taxes directly, but rather your taxes are paid through escrow, it is possible the mortgage company may continue paying the taxes, which could delay a tax sale.

If you are interested in learning more about stopping foreclosure, dealing with property already sold at foreclosure sale, or surrendering a home you no longer want to keep, please contact one of our experienced bankruptcy attorneys today. We help individuals and families file for bankruptcy in Missouri and Kansas.

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