Assuming that this is your primary residence, walking away from your payment obligations and allowing the home to go in to foreclosure will at least have no tax
consequences to you, if the foreclosure occurs before the end of 2011.
Normally when you have a debt that is cancelled or forgiven, even though you may walk away from the obligation of the debt itself, you are still liable for income tax
on the amount of the debt which was forgiven. In the case of a home loan, this can often be quite substantial.
However, due to the current mortgage lending crisis, Congress has passed temporary legislation which allows taxpayers who go through a foreclosure on their primary residence to exclude the amount of that debt from their taxable income
. This exclusion applies to foreclosures occuring up through the year 2011.
From a credit standpoint, any negative credit incident can legally stay on your credit report for 7 years, not just 2 years. So obviously this will have some impact on your future abiity to access new lines of credit.
As far as credit cards which you currently hold, your line of credit with those companies is always subject to review. Most credit card companies will periodically review your credit report on an average of once each year. If at the time of their review they find that your credit score has dropped significantly, they may choose to either lower your current line of credit or to cancel your card entirely. Unfortunately that's all part of the drawbacks to having a poor credit score.
But on the other hand if you can no longer afford to make these payments, then you have to weigh the benefits of walking away from the home obligation compared to the negative aspects of having your credit score lowered. In the worse case scenario, if your existing credit cards were to be cancelled, you can always obtain other credit cards which require you to deposit money up front to cover the line of credit they extend to you.
But the chief advantage here that I think you need to consider is the fact that going through this foreclosure now, or sometime before the end of 2011, will allow you to escape the burden of paying tax on that cancelled debt. Considering that this could be a considerable amount of tax that you might owe, that may far outweigh the possible negative consequences of having this put on your credit report.
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Thank you monkey, and let me know if you have more questions.