“Is this morally any wronger than declaring a bankruptcy when a risky (but not fraudulent) venture fails?”
Yes. It is.
A bankruptcy court process of a business does not allow the owners or the business to simply walk away from all their creditors. In fact, certain creditors can be required to be paid by the sale or confiscation of the owners/businesses assets, and certain creditors have top pick at converting debt to an equity stake, and certain creditors may be awarded payment from future revenue of the business after it is re-organized - and many other possibilities as well.
But, in almost every state in the U.S., a homeowner can just walk away and the mortgage-holder has “no recourse” because in almost every state all mortgages are by law “no recourse” mortgages. That is not the case in most other countries.
In most other countries if a mortgage holder forecloses on a mortgagee who is in default, the mortgagee will still owe whatever principal remains on the mortgage after the property is auctioned. Why? Because that is the amount of money the mortgage holder gave to the mortgagee.
In the U.S., they can never come after you for that loss. They can give you a million dollars and you can give them a few years of payments that (in the early years) just pay interest and no principal; and then you can walk away, “Scott free”, no matter how much of that million ever gets repaid to the people that gave it to you. Sorry; that’s immoral.
You’re quite simply wrong.
First, In all states, a person who simply walks away from a mortgage will have a tax liability with the IRS for getting out from under the debt without going through BK. So there ain’t a free lunch out of this. If you walk away from a $500K mortgage on which you had nothing down and you hand in the keys on a house now worth $250K, and the bank lets you, guess what? You have a $$250K income event which you must report to the IRS.
Here are the non-recourse states: Alaska, Arizona, California, Connecticut, Florida, Idaho, Minnesota, North Carolina, North Dakota, Texas, Utah, Washington. There are other states where a creditor can bring only one legal action against a debtor - ie, they’d better get it correct on the first crack.
In California, only the first loan to purchase a home is non-recourse, seconds and HELOCs can come after you for deficiency.
Now, as to bankruptcy, which you have egregiously incorrect:
There are multiple forms of bankruptcy. In the US code, there are four chapters that are applicable to individuals, not only businesses.
OK, one is a hybrid - Chapter 12 - for farmers and fishermen. Let’s put that aside.
Chapter 7 is a declaration of insolvency. Your assets are liquidated, and the court distributes the results to your creditors, who have to take what they can get. You are flat busted broke, but get your debts discharged (aside from student debt) and you get to start over.
Chapter 13 is used to get your debts restructured. Your creditors might have to reduce what you owe, or they have to get it back over a longer period of time. You do NOT get to walk away from everything.
Chapter 15 is a new chapter of the US BK code, and is designed to deal with debtors who had money loaned to them from within and *outside* the US, where there are claims of debt across international boundaries. That’s probably not going to come into play for most homeowners.
Huh, I never knew it was that easy. I thought banks didn’t bother because it was usually too much trouble (person likely to declare bankruptcy, blood out of turnip, Al Sharpton protests, and that kind of thing).
But. The forgiven amount has to go on your income taxes. Can’t bankrupt out of that.