As property values drop, homeowners may not be able to walk away from a mortgage debt even if they let the bank foreclose on their home, since lenders can sometimes pursue collection of the difference between what they sold the home for and how much was still owed on the loan.
Prior to the recession, banks that repossessed a home could usually recover what the homeowner still owed on the mortgage by reselling the house, according to Detroit News. Since housing values have plummeted, this is often not the case anymore, and banks may not be able to recover what they were still owed on the mortgage by simply initiating foreclosure and selling the house. When this occurs, some pursue the collection of the leftover debt, known as a mortgage deficiency, from the homeowner.
Many experts say that the best way to avoid the collection of this debt is to file for Chapter 7 bankruptcy soon after the foreclosure proceeding. By filing for bankruptcy when the consumer has few assets, such as soon after a foreclosure, they may be able to discharge any mortgage deficiency debt entirely.
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