As a result of the housing market crash, housing prices dropped in many regions of the United States. An underwater mortgage is a new term coined to describe house values that are less than the home’s mortgaged value. For example, let’s say that a couple bought a house for $300,000 and arranged a loan with their mortgage company. However, since the economic downturn, the fair market value for their house is now only $225,000. This is an example of an underwater mortgage.
If you have no plans to move or sell your house, you can wait out the market and hope that house values rise again. In better economic times, housing prices may increase, restoring the initial investment made in your home. Yet, today many homeowners encounter financial problems through job loss, unexpected illness, or divorce. Consequently, making mortgage payments may be tough.
You may decide to downsize and buy a less expensive house or sell your house and rent as a way to cut costs. The problem you run into with an underwater mortgage is that even after selling your house, you can still owe the mortgage company an additional $75,000, as in the example above. This is called a deficiency. The proceeds from a house sale would be deficient to cover the mortgage. In Pennsylvania, a creditor can seek a deficiency judgment to recover the deficiency.
Filing a Chapter 7 bankruptcy could resolve this problem for you. The way a Chapter 7 works is that the trustee liquidates all assets to pay creditors. Whatever the trustee gets for the house is the amount of money available to pay the creditor. The trustee does not pay the full debt amount in many cases. Whatever debt remains is discharged by the bankruptcy, which means your deficiency judgment disappears.
If you are struggling financially and have an underwater mortgage, consider consulting a bankruptcy attorney. Harold Shepley & Associates is a Pennsylvania debt relief law firm, and our attorneys offer a free consultation to discuss your financial issues. Call 1-866-284-7062 or visit us at www.shepleylaw.com.