Home Foreclosure: It Doesn't Pay to Walk Away

By Gina Gardner
NFNS Columnist

Popular media are making it seem like a tempting proposition. If you owe more on your home than it's worth, why keep throwing good money after bad? Just walk away! In fact, one article suggested that homeowners shouldn't wait until their credit takes a hit from late mortgage and other payments to dump their houses. Here's the deal: go buy a new home, similar to the one you have but for much less money — due to lower property values you might be able to score a great deal. Then just let your old house go. Brilliant financial strategy, huh?

Not really. It's a misconception that every time an investment's value drops you lose money. When your home's value inceases, you might feel richer, but you don't have more money in your pocket unless you sell it. And when property value drops, you aren't any poorer unless you have to sell it at a loss. These kinds of gains and losses are referred to as "unrealized" or "paper" because they don't have a real impact. However, the surest way of turning a paper real estate loss into a real one is to allow your home to go into foreclosure.

The reason is what is referred to as a "deficiency" judgment. In almost every state, your lender can foreclose on your mortgage, sell your property, and come after you for the difference between what you owed them and what they got for the property — plus attorney fees, interest and penalty charges, and any other costs they incurred. And if you walked away from a mortgage you could have paid it is extremely likely that your lender will be awarded all of that money. And if you hope to avoid the deficiancy via bankruptcy, think again. New bankruptcy laws mean that if you have an extra $100 a month after paying expenses deemed necessary by the law (referred to as a "means test"), you don't qualify to walk away from debt with a Chapter 7 bankruptcy.

In addition, once you have a foreclosure on your credit report you will be paying a lot more for credit of all types for a very long time. Most underwriters consider a foreclosure the absolute worst thing you can do to your credit, and few lenders will be anxious to put themselves in the role of "sucker" the next time you need a loan. So ‘walking away' when you have other options not only hurts your neighbors, your lender, and your reputation (foreclosures are public records) — it's a bad move financially.

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