Hold or surrender "upside down" homes?

[S2008]

We're wondering what the smartest thing to do is in our situation.
We "own" 2 homes, both upside down with 1st mtg and HELOC.
We love our primary home, our residence, even if it is valued well below our current mtg and HELOC balances we would love to keep it. Payment is not horrendous, we can handle it. We are leaning towards surrendering the rental property.

Our primary home (our residence)= -70K upside down
mkt value 260K
1st mtg 300k
HELOC 30K

Rental property = -80K upside down
mkt value 170K
1st mtg 200K
HELOC 50K

Would you hold or surrender these homes? We want a third party opinion.
Thanks for your opinion.

[JRScott]

Well this is something you'll have to answer yourselves.

If you are planning to live there the next 20 to 30 years then probably staying in it will not be to bad, as it would probably regain value in that time. If you are only planning to be there 5 years, then it might not be a good idea as you'll have trouble selling it.

I'd let the rental go though.

[HHM]

1. You need to detach yourself emotionally from the situation and look at the situation from a purely financial perspective.

The rental property is a no-brainer, you need to dump it, and cut your losses. Even when the real estate market comes back and stabilizes, it will be YEARS before that negative equity is wiped away and the money you are spending keeping that house can be used elsewhere to get a positive return.

I would probably recommend dumping the primary residence as well for much of the same reasons. You will likely be able to buy a comparable house in 2 years time for about what your current house is worth instead of taking 10+ years to dig out of the negative equity.

My main principle behind this recommendation is the opportunity cost of money. Ask youserlf, can the money you are wasting paying on a negative asset be better used, the answer is most certainly yes.

I say, dump both and start fresh.

[S2008]

Thanks HHM and JRScott for your opinion. Although we have negative equity in our current home, we seem to be emotionally attached to it . . . Hard to think everything in terms of $money$ only. It a nice little home (3BR, 2BA).

On the rental, besides the negative equity of -80K, it is also a negative cash flow. Each month, we've been feeding it $1000. The monthly rent we get from it doesn't cover even the 1st mtg payment. We have to pay for the HELOC and HOA expenses out of pocket.

On a related note, would you let the rental go before filing BK or would you surrender the rental at the same time of filing for BK?

Thanks!

[JRScott]

I'd do it during the BK, one hit on the credit report rather than 2.

[Minnymouth]

The main reason to file bankruptcy is to get a "fresh start" in life.

Getting rid of the rental house that is "upside down" is definetely a YES.....

Getting rid of your main residence because it also is "highly upside down" is probably the best thing you can do right now.

Why get a "fresh start" already in "the hole"??

Filing bankruptcy is a "business decision"...... try to keep your emotions out of the picture.

Everyone is "attached" to their homes..... we LOVE our homes!!!

But from the financial point of view, IF you are already upside down on the home, and even in the future may not re-coup your losses (depending on the market), why start all over again IN DEBT......

If you do keep your home, the future may be such that by keeping it you have put yourself in "financial stress" that if something happened, you would still loose your home and end up paying the "losses".... with no recourse for filing bankruptcy.

Its hard to start over, but often its the best thing to do in your situation. Look at it as an adventure.... a new beginnning...... financial freedom......

If you do surrender both properties, the next home you purchase (within 2-3 years) be sure that you not paying more than the home is really worth..... and that the mortgages are within your financial reach without putting you in financial stress.

These are hard decisions to make and often we have to leave our emotions out of the decision in order to "really see the light" and the effects of our decisions.

Good luck on what you decide to do, and keep us posted as to what you decide and how your bankruptcy is going.

[S2008]

Thanks everyone for your inputs!
If we decide to keep our current home, would we benefit from lien stripping? In other words, since the value of the house is less than the 1st mtg, would the HELOC be counted as an unsecured debt and included in ch13 payment plan?

[ssdsco]

Thanks everyone for your inputs!
If we decide to keep our current home, would we benefit from lien stripping? In other words, since the value of the house is less than the 1st mtg, would the HELOC be counted as an unsecured debt and included in ch13 payment plan?

[outofluck07]

Can anyone give me info on this situation...If I surrender my rental property, and schedule the mortgage from that property as unsecured, is that considered "business" debt, which would then help me qualify for non-consumer cH 7? It would become about 2/3 of total debt I need to discharge.

[Martha13]

Thanks everyone for your inputs!
If we decide to keep our current home, would we benefit from lien stripping? In other words, since the value of the house is less than the 1st mtg, would the HELOC be counted as an unsecured debt and included in ch13 payment plan?

I was just wondering what you've decided to do?

And, SSDCO, when you received the offers from your mortgage company, had you already filed bk?

[justbroke]

Can anyone give me info on this situation...If I surrender my rental property, and schedule the mortgage from that property as unsecured, is that considered "business" debt, which would then help me qualify for non-consumer cH 7? It would become about 2/3 of total debt I need to discharge.

I don't understand the surrender, then schedule as unsecured... I guess you mean to surrender it in the Bankruptcy and list the balance as an unsecured liability... however, it has to sell in order to determine the deficiency (what you owe).

It's debt insofar as it's not secured. What I mean is, say the properties have a balance of $300K together. However, they are worth and sell for $250K. The deficiency is $50K...

When you did your taxes in 2007, 2006, etc... did you use Schedule E to report the rental income? When you purchased the "rental" did you purchase it as a "vacation" or "2nd" home or as an actual investment property?

Your lawyer and you can try to claim it as business property, but those questions will be pertinent. The key is did you purchase it for you or your family/household? You may get some questions from the Trustee in going at it this way, but it may be worth it.

I actually was hoping my situation would allow me to have a non-consumer Chapter 7, but my primary residence is worth more than 3 times the value of my rental. OH well...

On your lien-stripping... do it if you decide to keep your primary residence. Make sure you get a property appraisal (Uniform Residential Appraisal form). It seems to work well... at least in Florida.

[ssdsco]

And, SSDCO, when you received the offers from your mortgage company, had you already filed bk?

Before BK and about 10 months from last payment.

I'm 16 months from last payment now and still no legal action other than the notice of default last fall. It's starting to look like I could have lived in the house or rented it out for a couple years before they give me the boot. The house is in MD.

[HHM]

Can anyone give me info on this situation...If I surrender my rental property, and schedule the mortgage from that property as unsecured, is that considered "business" debt, which would then help me qualify for non-consumer cH 7? It would become about 2/3 of total debt I need to discharge.

It is still secured debt insofar as the lender has a lien on the house. And yes, it would be considered business debt.

[PushRestart]

My lawyer told me to give up any real estate that is underwater so I could get a true clean start. As many great homes that are for sale now for so little, parting with my home is a bit easier to do. My wife and I figure that when we eventually purchase another home, it will cost us less but be as nice as the one we have now...

[msm859]

My lawyer told me to give up any real estate that is underwater so I could get a true clean start. As many great homes that are for sale now for so little, parting with my home is a bit easier to do. My wife and I figure that when we eventually purchase another home, it will cost us less but be as nice as the one we have now...

I would not make such a simple statement. The 1st question is how much underwater is the house -- and that should not be in absolute dollars but as a percentage. If you are $50k under water on a house worth $100k that will take a long time to get back to even. But if you are $50k down on a house worth $700k that could be made up in 2 years once the market returns. Also you have to look at what your mortgage costs are vs renting. Finally, you need to explore what modifications or settlements are available. I was underwater with my second but not my first. I was able to settle my second for 15% which got rid of the second and brought my house positive. I modified my first to a fixed low interest rate, thus giving up the house would have been wrong for me.