Original posted in the Baltimore Sun by Eileen Ambrose:
Every day more homeowners are underwater - meaning they owe more on their house than it's worth - and a growing number of them across the country are simply walking away.
They pack up, throw the house keys in the mail to the bank and start over. Sounds like an easy solution to a difficult problem.
"Anything that sounds really easy or guaranteed is not," says Anne Balcer Norton, director of the foreclosure prevention division at St. Ambrose Housing Aid Center in Baltimore.
Indeed, in Maryland and the majority of states, walking away is no guarantee that mortgage debt won't come back to haunt you. These are so-called recourse states, where a lender can pursue you for any shortfall after it sells the house. So if you walk away from a $350,000 mortgage and the lender turns around and sells the house for $250,000, you can still be on the hook for $100,000.
In Maryland, lenders generally can come after you for up to three years after the sale to collect. And that time limit could be as long as 12 years under certain contracts, says Phillip Robinson, executive director of Civil Justice Inc., a nonprofit legal services agency in Baltimore that assists residents statewide.
Housing experts here say they don't see a rash of lenders pursuing unpaid debt by Marylanders who have been foreclosed upon. But that could change once lenders get past more immediate problems of the housing crisis or start to sell unpaid loans to debt collectors who might want to go after that debt. Mortgage insurers, too, might seek to collect on defaulted loans they covered, experts said.
But this doesn't mean Marylanders can't get out from under an onerous mortgage.
As always, the first step whenever you are about to fall behind on payments is to contact the lender or loan servicer to review your options.
Even if a lender agrees to modify the mortgage terms - which doesn't happen often enough - some consumers still can't afford to stay in their houses.
Some homeowners might consider a short sale, in which you and a prospective buyer get the bank to agree to accept less than what's owed.
Make sure you have a lawyer or housing counselor to represent you in talks with the bank or loan servicer, Norton says. These experts can negotiate a deal so you won't be responsible for the unpaid balance.
Call 877-462-7555 to find a housing counselor, who can also refer you to a lawyer for free advice.
Beware, some real estate agents market themselves as short sale experts, but then fail to negotiate with the bank for any forgiveness of debt, says Tony DePastina, a litigation attorney with Civil Justice. Once you get your finances back in order, the lender could come back after you to collect the unpaid debt, he says.
For some, the only way to get out of the mortgage debt is to file for bankruptcy under Chapter 7, Robinson says. The lender won't be able to come after you for debt that's been discharged by the court.
All of these options have other repercussions.
Foreclosures and short sales, for example, are considered loan defaults, and will remain on your credit report for seven years, says Craig Watts, a spokesman for FICO, which created the most widely used credit score.
A Chapter 7 bankruptcy, which erases other debt besides the mortgage, causes even more damage to a credit score and stays on your credit report for 10 years, he says.
And what's on your credit report can affect your employment. Many employers, for example, review applicants' credit reports before hiring.
Maryland lawmakers earlier this year introduced legislation that would prohibit employers, with certain exceptions, from using credit reports to make hiring and firing decisions. That bill died when a House of Delegates committee voted it down on Saturday, after a Senate committee rejected a similar bill.
Another 15 states and Congress are considering similar legislation.