Given today’s economy and housing market, it is not surprising that many homeowners no longer view home ownership as the American dream. Considering the decline in property values, glut of houses on the market, and few buyers qualifying to purchase homes, for many it’s become a nightmare.
Often when I am talking with a person struggling with these issues, the person will say “my neighbor said I should just walk away,” or “my cousin quit making mortgage payments, lived rent free until his house was foreclosed on, and then just walked away.” What they mean is that they should just quit making their mortgage payments and move somewhere else. While this is an option, “walking away” has consequences many people do not realize.
Generally, in North Carolina, there is no such thing as just “walking away.” If you stop making mortgage payments, eventually the home will be foreclosed on. However, that is not the last word. Typically, after the house is foreclosed on, the mortgage lender will sue the former homeowner for thousands of dollars. This is a deficiency action. A deficiency is the difference between what the house brings at the foreclosure auction and the balance owed on the mortgage. For example, John owes $100,000 on his house. At the foreclosure sale, the bank buys it for $75,000. The $25,000 difference is called a deficiency, and even though John does not own the house anymore, he still owes the $25,000. The bank could sue him and get a judgment for that amount, which could be against him for the next twenty years (and could become a lien on any real estate John gets in the future).
What’s a homeowner who cannot make mortgage payments to do if they cannot walk away? Consult with a bankruptcy attorney. If the home cannot be saved from foreclosure, bankruptcy can wipe out the deficiency owed afterwards. Often, a foreclosure and bankruptcy go hand in hand.