Living in one of the twelve non-recourse states offers a unique advantage for homeowners struggling with their mortgage. In these states, you can relinquish your home without the bank chasing after your other assets. This might sound appealing, especially if your property’s value has plummeted and you don’t foresee recovery, making your mortgage feel like an unsustainable burden.
Many people found themselves in this situation during the financial downturn, leading to a wave of foreclosures in states like California, Arizona, and Nevada. These foreclosures were prevalent due to the non-recourse laws that allowed residents to walk away with fewer repercussions.
Here’s how it works: If you’re underwater on your mortgage—say you owe more on your home than its current market value—you can hand over the keys to the bank and walk away. This is particularly advantageous if you have significant assets that you want to protect from creditors. For example, if you have substantial savings but your house value has dropped significantly below what you owe, living in a non-recourse state allows you to preserve your other assets.
However, the scenario changes if you have taken out a second mortgage. In that case, the second loan might not be protected under non-recourse laws, which means you could still be liable for that debt. This can complicate your financial situation, potentially leading to bankruptcy as a last resort.
Bankruptcy offers another form of financial reset, with Chapter 13 allowing you to restructure your debts and Chapter 7 providing a complete discharge, depending on your financial circumstances and income level.
Non-recourse laws can provide a lifeline by allowing homeowners to step away from a crushing financial obligation with fewer long-term penalties. However, it’s essential to consider all legal and financial consequences before deciding to walk away from your mortgage, even in a non-recourse state.
