Declaring bankruptcy is an option to help underwater homeowners. When in default you can consider a strategic bankruptcy.

Q: About a month ago, you wrote an article about strategic default options for underwater homeowners. I was surprised that you didn’t mention bankruptcy with surrender as an option for underwater homeowners.

Going beyond strategic default, there’s a new term called “strategic bankruptcy” to shed underwater assets. This is especially important for those who can use a recent layoff, divorce, etc. and can do a Chapter 7. I thought you might want to share the experience I’ve had.

To be honest, it’s the best decision that I could have made. I tried playing the game. I tried refinancing three times, tried twice to get a loan modification, with the last denial coming after two complaints to the OCC, only to find the banks were playing with me.

But with declaring bankruptcy, I don’t fear getting a 1099 from my lender, can stay longer in my place as I got the automatic stay delay, don’t pay property taxes (they pay that money from the bank escrow, which I’m no longer required to pay into), and have no incentive to do a short sale vs. a prolonged foreclosure.

Heck, nothing prevents me from hiring a foreclosure defense attorney to make the foreclosure is as prolonged and expensive as possible. (As you can tell, I’m bitter with the banks that played games with me.)

Ultimately, I view the bankruptcy as having turned everything in my favor. My goal is to get a cash-for-keys offer. Given the number of people turning to bankruptcy, filing now is not so “unusual,” with potential employers not caring too much about a filing.

A: Thanks for your comment. I think it’s unfortunate that you had to file bankruptcy in order to get your lenders’ attention. That was a miss on the lender’s part. But while bankruptcy is always an option for homeowners to consider, there are several severe consequences.

First, it will stay on your credit for up to ten years, but as you note, it can provide you with a fresh start. Second, any job with financial responsibility will likely require a credit history pull, and could impact negatively a hiring decision. Many employers do regard bankruptcies with horror, as it makes them think the individual cannot manage his or her personal finances, and so they naturally wonder about the implications for managing a company’s finances.

Millions of Americans have applied for bankruptcy protection over the past six years. The downside to choosing bankruptcy is that due to the stricter rules and regulations, not everyone qualifies. If you have any sort of income and assets, you may not qualify for bankruptcy and may spend money needlessly pursuing this option.

We have received quite a bit of mail from property owners aghast at the thought of homeowners walking from their loans in a strategic default. Bankruptcy takes this a step further.

Many homeowners that are able to sell their homes in a short sale or mail their keys back to their lenders, find themselves thinking about bankruptcy later when bill collectors come after them. While you filed early in the process, many people may still find themselves looking to a bankruptcy court for protection in later years.

When your debts are overwhelming and creditors are coming after you, bankruptcy court has helped many Americans seek protection and get a fresh start financially. Bankruptcy isn’t without its drawbacks, but at least it gives people a chance to start over.

Before you file for bankruptcy, you may need a certificate from a company that is licensed by the Federal Bankruptcy Court. Credability.com, a nonprofit credit counseling agency, offers a bankruptcy certificate and can provide the kind of counseling that will help you decide whether this is an option for you.

Finally, your bitterness is felt by quite a number of homeowners that have tried to play by the rules only to find out those rules were changed mid-game. We’re not talking about homeowners that may have qualified for a $400,000 home when they only earned $20,000 per year. We’re talking about hard-working homeowners who lost their jobs or suffered severe income setbacks and were told by our government and the banks that there would be help, only to find out that the process was slow and flawed.

Certainly, the entire mortgage industry, including the government, lenders and servicers, were caught by surprise at how deep and pervasive the Great Recession turned out to be. It has been a long five years. But until Americans and the financial industry work together to clear out the shadow inventory, the real estate market will be unable to normalize.