When you Walk Away from Your Mortgage

I know I’ve been tempted to walk away from my mortgage. I have renters who are taking care of most of the monthly mortgage (not all though). But I’m having to rent another home as a result. While the net financial result is +$400 per month, there’s still a psychological toll. I don’t like being an absentee landlord. I don’t like not being able to check on my house every few weeks.

But what happens when you make that choice? To abandon your mortgage? According to a recent Miami Herald discussion, walking away from your mortgage isn’t risk free.

Yes, it might take as long as a year before you’re permanently evicted. Yes, it may seem like a boon to live in a rent free home during that same period. Even taking the ding in your credit seems like a small price to pay. Everyone’s taking a ding, right?

The biggest wild card for borrowers is whether banks will go after them for the remainder of the unpaid loan or what’s known in the legal world as a “deficiency judgment.” A foreclosure or even a short sale doesn’t necessarily mean that your debt is forgiven.

What does that mean? It means that if a bank determines you have the means to pay (i.e. you were vacationing on their dime while your payments languished) then it’s worth their time to come after you. Obviously, if you don’t have a job then you probably don’t have the means. But even joblessness isn’t as safe a haven as previously thought.

“It is my belief that banks will begin to sell off the money they are owed to collection companies in the coming years that will, in turn, aggressively pursue collection efforts,” says Matt Englett of Kaufman Englett & Lynd, a law firm that specializes in foreclosure cases. “There will be a whole new cottage industry created as a result of this.”

A lender or collections agency (or worse) coming after you may be the least of your worries. You may also owe back taxes. Declaring bankruptcy won’t help you on the tax side. Remember, taxes are forever.

And of course there’s the credit score issue. A foreclosure remains on your credit report for 7 years. This may have even more of an impact in the current economic environment. Whereas lenders (or landlords or apartment owners) may have been quick to overlook past financial mistakes just a few years ago, your poor credit score may not be worth the risk.

Read more about walking away from a mortage.