Defaulting on a mortgage
Question: Hypothetical situation that I’d like to understand: If I have a $800K mortgage on a $1MM house, and the house’s value drops to say $750K, and I decide that I don’t want the house anymore, what can happen? If I walk away from the house, and the bank sells the property at value, the bank is still out $50K. Can they come after the borrower for the $50K, and liquidate my other assets (stocks, e.g.) to pay for their loss? I suppose if I’m broke I can declare bankruptcy and be on horrible credit for 7 years.
Are there ways to protect my non-real estate assets from the mortgage creditor?
Answer: First, a bankruptcy stays on your credit report for ten years, not seven. After ten years federal law requires credit reporting agencies to stop reporting it.
As for your other question, what you are asking about is a deficiency judgment. That is a state-specific question. In some states they can’t get a deficiency judgment against you if it is a personal residence. In some states whether or not the lender can get a deficiency judgment is determined by the type of document (e.g., mortgage, trust deed, land sales contract). In other states the deficiency judgment is allowed unless the creditor is the seller. In other states all creditors can get deficiency judgments. In yet other states no one can. In short, there are too many variables to answer your question. You need the advice of a local real estate attorney. Not without committing fraud. If you commit a fraud against a lender it gives the lender the right to ask a bankruptcy court not to discharge the debt. Fraud is also a criminal act.
Having said that, if the lender cannot get a deficiency judgment against you (see above), then all your other assets are automatically protected; that is, the lender’s sole remedy is the collateral. as far as I know, Chapter 7 Bankruptcy (liquidation) is for 10 years. Chapter 13 Bankruptcy (also called the “wage earner’s bankruptcy”) is for 7 years. Chapter 7 means you are free and clear of all debts after selling off your possessions that by law must be sold. Chapter 13 is where you are free of debt for a while but must pay a credit counselor who disburses your payments to creditors as necessary.
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