Let’s say that your house has depreciated in value to the tune of negative equity. In addition you have lots of debt. A major factor in your debt is house payments that you can no longer afford. You figure that selling the house will cost you about $30,000.
If you declare bankruptsy, how will a court handle this? Could you just ask the judge to give the house back to the bank and walk away, or would you actually need to first sell the house, take a loss, and then declare bankruptsy?
Thanks all.
IANAL, but in my experience, yes, you could do what you’re describing. The exact situation happened to someone I know; she’d bought a house, and then lost her job a few years later when the economy took a dive. The property values in the area had also taken a dive & she couldn’t afford to pay for the house, nor would she have been able to sell it for the amount she owed the bank. When she filed for bankruptcy, she had it set up so the house would revert to the bank and she’d be absolved of further debt.
If this is something you’re considering doing, you really should check with a bankruptcy attorney in your area before you do anything. You want to make sure you have all your ducks in a row, and an attorney is the best way to make that happen.
After you have filed a suit for bankruptcy, a trustee is appointed for your estate. All creditors must file their claims in the proceedings and all suits against your property are “stayed.” A mortagee that wants to foreclose your property must be granted permission from the bankruptcy court to proceed with the foreclosure proceedings. Unless you give the mortagee a deed in lieu of foreclosure (which also would need the court’s approval), the mortgagee must go through the foreclosure proceedings. If your property is so worthless and you are in bankruptcy, I see no reason why the mortgagee would not accept the deed and save a lot of time and money.
Upon reflection, I can think of a good reason why a mortgagee would not accept a deed of the property: other liens on the property. Foreclosure proceedings not only foreclose your “equity” but also all rights and liens of other parties provided they are made parties to the proceedings and provided their liens are not superior, such as tax liens or other and prior mortgages.