You sell your house for half what you paid for it. But your MORTGAGE hasn't been reduced by half. You pay the difference.
In practice it doesn't work this way, at all. I've handled hundreds of these on peoples' tax returns during the crash of the 80s, and I've never seen a person pay off a deficiency.
What happens is a person owes 300K on a house that's worth 200K. He says, "I'm not spending the next 20 years of my life paying for this turkey." So he walks away from it. The house is handled through the state's foreclosure process (in some states, sold on the courthouse steps to the highest bidder).
Frequently, the property is "bid in" by the mortgage holder, but an attempt will be made to get FMV for the property, 200K in this example. Ultimately, a deficiency judgment is entered against the homeowner for $100K plus fees, etc.
That 100K can be settled if the homeowner has any money, typically for cents on the dollar. But as you say, most times, the homeowner doesn't have the money. So, it is a judgment against the homeowner but is never collected unless he just falls ass-backwards into enough money to choose to settle it. I've seen many millions of dollars worth of these judgments just evaporate into thin air (other than the tax consequences, which can be a problem). |
