Can I keep my home even if I can’t afford it?

New Yorkers who are struggling every day in a tumultuous economy have hard choices to make. Between paying the mortgage, car payments and other bills, or putting food on the table, people can become buried under impossible debt and feel helpless at finding a solution. It may seem easier to just let the home go into foreclosure rather than to keep fighting.

Fortunately, there are options for getting debt relief or debt management, depending on the individual’s unique situation. Developing a strategy for the future is an important first step to regaining control of your life.

Is it better to let the home go into foreclosure?

Many people decide that if they can no longer make monthly mortgage payments and know that they actually have negative equity in the home, it is better to walk away from an underwater mortgage. What happens in this scenario is that the homeowner either stops making payments or does a short sale.

If the home goes into strategic foreclosure, the portion of the debt that a financial institution may forgive is taxable income under IRS rules. Not only that, this action will also have a negative impact on the person’s credit score. The foreclosure will remain on the consumer’s credit score for years later, making it difficult to obtain a loan.

Another option is a short sale, in which the borrower may ask the lender for approval to sell the home for less than market value. A deed-in-lieu is another option, in which the borrower signs the deed over to the lender instead of foreclosing. However, in either case, the borrower may face a deficiency judgement later.

Are there other options that will let me keep the home?

It is possible to keep the home even when you cannot make payments, such as:

• Asking the lender for a principal reduction. Not an ideal option for the banks, but this is preferable to having the home go into foreclosure.
• Working out a loan modification, in which the homeowner negotiates with the lender to lower payment amounts, especially if they are experiencing financial hardship.
• Refinance the home, which is possible if the home has equity built up.

Chapters 7 and 13 are also options for debt relief or management, especially considering the generous homestead protection laws that New York State offers. Of course, there are conditions that will determine which type of bankruptcy would best serve your needs.