The Short Answer
Whether walking away from your home without filing bankruptcy is safe depends entirely on your equity — the difference between what your home is worth and what you owe. If you have substantial equity, the foreclosure sale may cover the full balance and you may not owe anything further. But if you have little or no equity, the bank can sue you for the deficiency balance — whatever the foreclosure sale didn't cover — and obtain a court judgment against you. Filing bankruptcy can potentially wipe out that deficiency balance entirely, which walking away alone cannot do.
When we have a consultation with a prospective client we do everything we can to explore every option that the client may have. Then, the client decides which direction they would like to head. One of the frequent questions we get is what happens if instead of filing a Chapter 7 bankruptcy or a Chapter 13 bankruptcy they just give up the house and walk away. The answer to that question really depends upon whether or not you have any equity in your house. Equity is the difference between the value of the house and how much you owe.
Substantial Equity: If you have substantial equity in your house then you may be okay just walking away. Typically what happens is the bank will foreclose on the home after you walk away and sell. According to a MSN Money article, John T. Reed, the Editor of Real Estate Investor’s Monthly, a foreclosed home will sale about 5% below the market average but may be up to 30% or 40% below market value.
If the mortgage company is able to recover the full amount that you owe on the property then you are not likely to owe any more money for the foreclosed home. However, you will still have a foreclosure that appears on your credit report.
Little to No Equity: If you have little to no equity in your home and the bank is unable to recover the amount you owe then you will be responsible for the unpaid balance which is called the deficiency balance. In other words, if your foreclosed house sold for $100,000 but you owe $150,000 on the house, then you would still owe the bank $50,000. It is unlikely that you will have $50,000 to pay out of pocket so the bank has the ability to file a lawsuit against you and obtain a judgment. That judgment could eventually lead to a lien on your different types of property. Liens are bad news – you don’t want one!
Typically speaking, foreclosed properties will not recover the full amount owed to the bank for the mortgage. Therefore, they will look to you to pay the deficiency balance. A bankruptcy has the ability to potentially wipe out this entire balance.
The bottom line: if you still owe money for the mortgage even after the foreclosure sale of your home then you will be liable for those costs. Bankruptcy can usually wipe out that left over balance. If you do nothing they will file suit against you and have a judgment that may attach to your property. Ideally, you don’t want a foreclose to appear on your credit. Bankruptcy gives you the ability to keep the foreclosure off your credit and wipe out the deficiency balance.
Key Takeaways
- Walking away from your home triggers foreclosure, and the outcome depends on whether the sale price covers what you still owe on the mortgage.
- If the foreclosure sale falls short of your loan balance, you are personally liable for the deficiency — which could be tens of thousands of dollars.
- A creditor with a deficiency judgment can attach that judgment as a lien to your other property, creating serious long-term financial problems.
- Filing bankruptcy can potentially eliminate the deficiency balance that a foreclosure sale leaves behind, something that simply walking away cannot accomplish.
- A foreclosure will appear on your credit report regardless; bankruptcy may help you resolve the underlying debt and begin rebuilding sooner.
- Consulting with a bankruptcy attorney before walking away lets you understand all your options — including whether Chapter 7 or Chapter 13 could protect you from a deficiency judgment.
Attorney Insight
The mistake I see most often is people assuming that once the bank takes the house, the debt is gone — they think walking away is a clean break. It rarely is. In most North Carolina foreclosures I've seen involving underwater properties, the bank pursues the deficiency balance, files suit, obtains a judgment, and that judgment can attach as a lien to any real property you own now or acquire later. Filing bankruptcy before or shortly after a foreclosure can eliminate that deficiency balance and prevent a judgment from ever being entered against you — but once that judgment is in place, your options get more complicated.
