Even though a lot of areas are slowly recovering from the housing market crash in 2008, there are a lot of homeowners who are still upside down in their mortgages with no hope of recovering their lost property values. That's forcing a lot of people to make some hard choices, which may include walking away from their mortgage and property. If you're considering this option, learn more about how filing for bankruptcy can affect your situation.

How can bankruptcy help your situation?

While every situation is unique and you should consult with an attorney before you make any final decisions, it will probably benefit you more if you file for bankruptcy before simply walking away from your home. If your home is close to going into foreclosure, filing for bankruptcy will usually temporarily halt the process. The bankruptcy court will generally issue an order called an automatic stay, which puts debt collection practices on hold until the court grants permission for them to continue. This gives you two basic options:

  • You can take the time to possibly negotiate a refinancing plan with your lender in order to avoid having to let your property go into foreclosure at all.
  • You can take longer to vacate your property, which can allow you to save up the money you need in order to make your transition to a new place easier.

Either way, filing for bankruptcy may give you the time that you need to make a careful, measured decision, rather than one that is rushed and not to your best advantage in the future.

What happens if you still decide to let the property go?

If, for whatever reason, your current financial situation makes refinancing the mortgage an impossible or impractical option, filing for bankruptcy protection before you allow the home to go back to the bank is still probably your best option. This is because it allows you to handle the problem of any deficiency judgment at the same time you let the house go, rather than waiting to see what the lender will do later.

When a house goes into foreclosure and is ultimately resold, the difference between its sale price and the outstanding mortgage can be charged against you as a deficiency. In some cases, the lender may realize that there isn't any point in pursuing you for the balance. In others, they will seek a personal judgment against you in civil court for the deficiency that can haunt you financially for years to come.

By filing for bankruptcy before you let the house go, you resolve the issue. The total mortgage debt is included in your bankruptcy, which means that the debt will already be forgiven and the lender won't be able to pursue you for any additional money.

For more specific information about your situation, contact a firm such as Shoemaker & Dart P.S. Inc to discuss your case.