Underwater Mortgages: Should You Walk Away from Your Home or File Chapter 13 Bankruptcy to Stop Foreclosure?

The housing crisis isn’t through yet. Home sales are down, in part due to the millions of young would-be homeowners who are struggling to find employment and pay off overwhelming student loan debts. Even recent falling mortgage rates haven’t been enough to boost the real estate market.

But it’s not just young adults who are affected by the crisis. With housing prices stalled in dozens of U.S. markets, foreclosure remains a very real threat for many Americans who already own homes.

According to Zillow, 9.7 million households – or more than 18 percent of all homes – are underwater, meaning their owners owe more than the houses are worth. More than one-third of all homeowners reported having less than 20 percent equity in their properties.

Previously, the answer for many of these underwater homeowners has been to walk away from their mortgage debt. But is giving up your home the right decision for your family? In a majority of cases, filing for Chapter 13 bankruptcy can be a more advantageous solution. Here are some things to consider when faced with losing your home.

The Effect on Credit

Many folks fear that filing for bankruptcy to save a home will wreck their credit. But while it’s true that bankruptcy will be recorded on your credit report, the damage won’t be permanent. In fact, eliminating debt through bankruptcy may be the only way you can stop the financial bleeding and start rebuilding your credit score.

Surrendering your home, on the other hand, can deal a long-lasting blow to credit. In addition, you may owe state taxes on your remaining unpaid debt, depending on the state you live in.

If your credit has already hit rock bottom and you aren’t interested in keeping your home, walking away from your mortgage debt may make sense. But for most people, Chapter 13 bankruptcy is a much more beneficial – and less damaging – solution.

Finding a New Place

If you walk away from your home, you’ll obviously need to find a new place to live – which usually means renting. Before you make a decision, make sure to evaluate what you’re looking for in a residence.

For instance, do you like your current home? Does it meet your needs? Do you like the location and neighborhood? What is the average rent for homes or apartments with the location, square footage and amenities you require?

In many cases, your rent payment may not be much cheaper than your current mortgage. But remember that when you pay rent, you don’t get the equity, tax benefits or credit boost that you do with home ownership.

If you have a desire to stay in your home, Chapter 13 bankruptcy may allow you to do so. However, if you are truly unhappy with your house, are looking to drastically downsize or want to move to a new location, it may not make sense to stay.

Looking to the Future

One of the biggest drawbacks to defaulting on your mortgage is the impact it will have on your future.

If housing prices rise, as they always do eventually, you won’t be able recoup your lost value. And since rents and housing prices tend to move together, you may find yourself paying out more each month as a renter than you did as a homeowner.

If you apply for another mortgage years later, you could still be haunted by your voluntary foreclosure. Most banks won’t consider approving loans for borrowers who have walked away from their homes for four to seven years. And of course, if you never resolve the cause of your mortgage default, you may never be able to qualify for another mortgage – at least, not one with realistic terms.

Bankruptcy is never a decision to take lightly. But when you’re facing foreclosure, Chapter 13 may be the answer. Bankruptcy has the power to protect your house while you eliminate overwhelming debts. Imagine getting to keep your home and find a fresh start! To find out if Chapter 13 bankruptcy could be a solution for you and your family, schedule your free one-on-one debt evaluation with an experienced DebtStoppers foreclosure attorney today.

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