Can I just “walk away” from a house on which I cannot pay the mortgage?

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Can I just “walk away” from a house on which I cannot pay the mortgage?

Walking away from a home mortgage has consequences

You are free to move if you cannot make the payments on the house in which you live. There will likely be consequences, the seriousness of which will vary.

If you do not make payments, there will likely be a foreclosure sale of the property. Unless the foreclosure sale yields proceeds sufficient to pay the remaining mortgage debt and the costs of foreclosure, you will still owe money to the foreclosing lender (or to the lender’s insurer). A mortgage and a deed of trust have similar purposes and are essentially identical for the purposes of this discussion.

If a judgment for this “deficiency” is entered, your wages or your bank account(s) could be garnished, and other property that you own might be seized and sold.

Collection of a judgment, however, takes time; and there is a limit to what judgment creditors can do after foreclosure to compel payment. You can’t squeeze blood out of a turnip. A person unable to make payments to avoid a home foreclosure is likely in severe financial distress. Certain amounts and types of income and assets are protected from judgment creditors or can be claimed as exempt; and a judgment creditor is unlikely to gain anything by driving the debtor into bankruptcy. Some creditors view attempts to collect deficiency judgments as throwing good money after bad

Even if there is no attempt to obtain and collect a judgment, however, a deficiency will damage your credit. You might want to explore alternatives to “walking away.”

Absent significant equity, the lender usually buys the property at the foreclosure sale. Then, after foreclosure, the lender attempts to sell the property. If the lender has insurance, the lender may, post-foreclosure, transfer the property to its insurer in exchange for the insurer’s payment of the deficiency owed the lender. The insurer then sells the property.

Whether the post-foreclosure sale is by the lender or the lender’s insurer, it typically has no effect on any foreclosure sale deficiency owed by the borrower.

If you cannot make payments, modification is not in the cards, a foreclosure sale is unlikely to produce enough to cover the debt, and you have someplace to which you can move, you might consider talking to the lender about transferring the property to the lender in exchange for a release from further liability.

If there is no equity but you can find someone willing to purchase the property at or near its market value, you might consider talking to the lender about a short sale (where the lender allows you to sell the property for less than what you owe), coupled with a release from further liability.

Either alternative could spare you a deficiency and save the lender the costs of foreclosure.

Where a foreclosure sale purchase by the lender is anticipated, a short sale could also save the lender (or its insurer) the time and cost associated with selling the property after foreclosure.

Robert McCaig is chief attorney at the Lower Shore office of the Legal Aid Bureau in Salisbury. Questions can be sent to: Legally Speaking, The Daily Times, 115 E. Carroll St., Salisbury, Md. 21801-5421.

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Sean McCracken

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