Some people decide to walk away from their properties because they are too far underwater on their mortgage payments.  They believe that since the lender now has the house, they are now off the hook for the money owed, and the lender can’t come after them. 

Is this true? Well - as with all things legal – it depends.

If you only have a first mortgage on the property, this strategy may work.  In California, a first mortgage is generally a non-recourse loan, which means a lender cannot get a deficiency judgment against a person in a non-judicial foreclosure (which most foreclosures are).   However, you may still be liable for income tax on the difference between the amount you owed, and the amount the lender sells the property for.  The reason for this? The IRS treats as income the amount you didn’t have to pay back.  If you’re thinking that’s pretty nutty, I agree. 
Check out this post for more information on the tax consequences of a foreclosure or short-shale versus a bankruptcy.   

Now, if you have a refinanced mortgage, an equity line of credit, or a second mortgage, those loans are most likely recourse loans.  This means that you are still personally liable for the amount you owe.  The lender can sue you – and eventually garnish your wages -   for something you thought you had walked away from. I’m seeing more and more people each day that are being hounded by collection companies coming after them for those recourse loans. 

 So, what are your options? They are: 1) pay the outstanding amount owed (good luck trying to negotiate with the bank); or 2) look into whether a Chapter 7 bankruptcy filing will wipe out the debt.  If you do not have significant assets, and don’t have disposable income each month, it likely will.


If you're in the San Francisco Bay Area and need a Chapter 7 bankruptcy attorney, the Law Office of Mauricio Ramos is always happy to help.