The first thing you have to figure out is your economic interests: is it in your economic interest (or necessity) to walk away from your debts to the extent you can? See the Walk Away Calculator for that. If you think it might be in your interest, the key concepts and strategies to understand here are:
Personal Liability Tax Liability Credit Impairment
Loan modification Short Sale Stealth Walk Away Bankruptcy
Personal Liability: Obviously there is no point walking away from your debts if you are going to owe the money anyway and you are in a position where you are susceptible to collections. Fortunately California has pretty good (but complicated) anti-deficiency protections in place.
Tax Liability: Getting out of a debt generally (but not always) creates taxable income. Fortunately there are temporary tax relief laws in place that prevent these consequences for some borrowers. The temporary nature of this tax relief creates real incentives for many people to walk away sooner rather than later.
Credit Impairment: Of course your credit is going to take a hit if you walk away from debt. Its only fair really. Fortunately the credit impacts do not have to be that severe if you handle the situation correctly. Whatever the negative impacts of a short sale, for example, its a lot better than foreclosure or bankruptcy.
Loan Modification: First, don’t get ripped off. Seriously. The loan modification industry is scam-ridden. The best thing to say about loan modification currently is that its worth a shot, particularly if you qualify for the Homeowners Affordability Modification Program (HAMP), but don’t count on it. And do not think your going to get principal forgiveness (though principal forbearance is a possibility).
Short Sale: This is probably the most important tool for the middle class and up victims of the housing crash. If you want principal forgiveness, you have to give up the house. That is the emerging tacit compromise between borrowers and lenders. Although lenders will tell you that you have to “qualify” for a short sale through “hardship,” the fact of the matter is that you can get this done even if you have a high income and net worth. Short sales are even a good tool for settling problematic personal liability situations. But be careful. You need to make sure you have the right deal and paperwork, or you can go through a short sale and still owe the debts.
Stealth Walk Away: The problems with short sale and loan modification are that you have to disclose your financial information and documents to the lender. Sometimes this just is not worth the risk for you. One advantage you have as a borrower these days is that the lenders really have no idea who you are because their underwriting and record keeping over the last several years was so shoddy. If you face a lot of personal liability exposure, have a lot to lose, and can live with the credit impacts, sometimes it may be better to just fade away.
Bankruptcy: It is an important tool in some situations, especially if you have a gargantuan tax problem. But its oversold in these situations because its of limited use where secured debt, like mortgages, are involved. I have seen many borrowers file bankruptcy for no good reason.
THIS IS AN INFORMATIONAL WEBSITE. IT IS NOT LEGAL OR FINANCIAL ADVICE. IF YOU ARE THINKING ABOUT WALKING AWAY FROM YOUR MORTGAGE, YOU SHOULD CONSULT WITH A LAWYER.