Bankruptcy Allows Home Owners to Walk Away from Underwater Mortgages

Bankruptcy is never anyone’s first option, however, it does provide the underwater homeowner with the option of surrendering a home and walking away with no deficiency judgment and no tax consequences. A Chapter 7 bankruptcy wipes away your personal obligation to pay debt—including the personal guarantee on your mortgage. Your lender’s only recourse is to take back the collateral for the loan, your home.

In foreclosure or short sale, lenders have the right to sue for the difference between the mortgage amount and the amount recovered through the sale of the home. However, in Chapter 7 bankruptcy, lenders cannot come after you for a deficiency judgment. If you can no longer afford your home, it may be wise to consult a bankruptcy attorney to discuss your options.