I have to share an awesome story that I just heard from a former client of mine. When I first met them in October 2014, they were hoping to save their house. But it was worth $310,000, and they had a $394,000 adjustable-rate mortgage on it, and the payments had spiraled way beyond their ability to pay. They tried to modify the loan, but were unsuccessful in getting any sort of principal reduction. So after serious contemplation of all options, they decided to let the house go, and as a result we waited until just before their Sheriff’s sale and filed a chapter 7 last year, which stopped the Sheriff’s sale. The house ultimately went back to the auction block this past March. Typically at a foreclosure auction, the mortgage company usually just bids the amount owed. But the actual bid was $231,000, which then accorded my clients six months to pay that off, which they are now doing by way of selling it for $315,000. So after living in an underwater house and not making payments for a year and a half, they will now be walking away with a little over $60,000 to put down on their next house! And in a year, they will qualify to get a new mortgage.
While I have seen this happen before, it is very rare. When I counsel people facing foreclosure on their options, I usually don’t even bring this possibility into the mix, because it’s sort of like telling them “you could also win the lottery to work your way out of debt.” And of course, you won’t find out what will happen until the Sheriff’s sale, and by that time you lose your option to stop it with a bankruptcy.