Two years ago most of my clients would have done anything to remain in their homes and survive a foreclosure action.

Now, since the drastic decline in home values and the increase of unemployment, many families are more than happy to walk away from their home and mortgages.  A typical homeowner in Rockland County may have a first mortgage and a Home Equity Line of Credit (“HELOC”) that exceeds the value of the home.  If they are not already in foreclosure, then they are struggling to make the monthly mortgage payments and still keep up with their monthly living expenses.

Once a foreclosure action is commenced, a homeowner’s first reaction may be to “save the house” at any cost.  They may borrow money to pay the arrears, or attempt to modify the loan and continue paying lower, yet still unaffordable, mortgage payments.  It takes a while for a homeowner to psychologically admit that they may be financially better off surrendering the home to the bank.

A client that decides to surrender his home must first calculate the consequences of a surrender, especially in light of a potential bankruptcy filing.

A recent Morgan Stanley report reveals that many homeowners have been intentionally defaulting on their home mortgages, or letting the foreclosure action take its course through the court system (typically 9-12 months in Rockland County).  In the interim, these homeowners have saved months of mortgage and real estate tax payments, as well as the everyday expenses of home maintenance (new boiler, new roof, etc.)  These homeowners have been able to save a nest egg in order to move and secure a rental apartment.

However, having your home reach a foreclosure sale entails certain dangers.  Once the house is sold to a third party or the deed is transferred to the bank, the bank is entitled to sue the homeowner for the “deficiency” (the mortgage amounts less the actual sale price of the home).  In today’s economy, the first mortgage lender may not recover its full mortgage, and the HELOC lender may recover nothing.  The average deficiency judgment in Rockland County may range from $50,000 to $200,000.

This “Deficiency Judgment” is an unsecured debt, which may or may not be discharged in a bankruptcy case, depending on the client’s financial situation (see my website for the different requirements of a Chapter 7 and 13 Bankruptcy filing).

Obviously, a homeowner should discuss his foreclosure defense strategy with a bankruptcy attorney before proceeding in the State Court.  It may be beneficial to file a bankruptcy case during the foreclosure action, which would delay the foreclosure and ensure that the mortgage(s) are truly discharged when the house is sold.  Alternatively, it may be beneficial to delay a bankruptcy filing until after a foreclosure sale is completed, when all real estate taxes are satisfied and you can best judge the amount of the deficiency a client is facing.

It is always best to seek the advice of a competent bankruptcy attorney before defending a foreclosure action.  Anticipating the bankruptcy consequences will enable your client to decide how best to defend, or not to defend, the foreclosure action.