How does Chapter 7 help when I am giving up a house to foreclosure?

Sometimes, a house becomes too expensive for its owners to continuing living in and paying the mortgage. Changes in income can make what was once affordable now unmanageable. Problems with a house or mortgage terms can push the cost of ownership beyond one's means. Sometimes, there are opportunities to work things out the mortgage. Other times, the smart decision is to walk away from the house and allow the bank to foreclose.

Unfortunately, foreclosure doesn't always eliminate the debt associated with the mortgage loan. Mortgages in North Carolina are generally recourse mortgages, where the lender has the option to get money both by foreclosing and selling the collateral, and by suing and collecting from the borrower. These options aren't mutually exclusive, so if a mortgage lender does not get paid in full by the foreclosure sale, it can continue to seek the deficiency balance personally from the borrowers. Ultimately, if the lender sues it may obtain a deficiency judgment, on which it can use legal process to collect from the borrower's other property and accounts.

How big a deficiency balance becomes is a product of the value of the property compared to the foreclosure sale price. Mortgage deficiency debts in the tens of thousands of dollars are not uncommon.

While chapter 13 bankruptcy is often the solution if one want to stop foreclosure and keep a house, either chapter 13 or chapter 7 bankruptcy can help eliminate the debt of a mortgage deficiency. A deficiency balance is an unsecured debt, almost by definition, as it is the leftover amount from a secured debt where the collateral has been sold. This type of unsecured debt is discharged by the bankruptcy discharge. Chapter 7 bankruptcy is the straight route to eliminate such a debt, if the additional powers of chapter 13 are not needed. Filing chapter 7 bankruptcy allows the mortgage borrower to be truly done with a house he or she has surrendered for foreclosure.

If you are contemplating walking away from an unaffordable house, you are welcome to contact us for a free consultation. The timing of how you leave a property can have important consequences to your financial liability, and becoming aware of your bankruptcy alternatives beforehand can help you make an informed decision.

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