If you are facing foreclosure, you might be tempted to just pack your things and leave your home. At this point you know there is little to no equity in the home, no money to pay the mortgage, and you're better off just saving money to rent an apartment or pay for necessities such as food and medicine. However, there is a danger that you can be held to a deficiency judgment and be responsible for paying any debt that remains after the bank has sold your home.

If you owe $250,000, and the bank sells your home at an auction for $175,000, you will then be responsible for $75,000 in debt. The bank can file a law suit against you to collect the balance and this is perfectly legal in many states.

However, should you be a resident in state that has a long redemption period, you can legally remain in your home without making payments until the redemption period is over. In places like Michigan, this is usually six months. During this time, you can save money in a nest egg that you can use to rebuild your finances.

Walking away from your home may be a viable solution because it is the only collateral securing your loan. When you signed the papers for your mortgage, you promised the bank that they can take possession of your home if you stop making payments per the agreement. A smarter way to walk away without having the bank come after you with a deficiency judgment is to negotiate a deed-in-lieu of foreclosure. This agreement basically stipulates that in exchange for the deed (right of ownership) for your home, the bank will forgive all of your debt.

Make sure to get any negotiated deal with your lender in writing, a signed letter from the bank's representative stating that you are free and clear of any obligation to them. You should also have an attorney look over anything the bank asks you to sign. You want to be certain there is no way the bank can come after you to collect unpaid debt after you give up ownership.

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