The ebb and flow of bankruptcy is moderated by judges who sit between the contesting parties. Nothing is done until the judge allows it. The first action is always to put some entity in charge to continue the status quo... taking over the process of collecting payments while the 'players' sort out their positions.
The average guy who doesn't want to screw up his future credit (the vast majority of people) will continue to pay on time and will continue to live in the house that they have a title to.
There will be some percentage of marginal persons who can't pay, but who will go to the bank and try to work something out. They will get a degree leniency, not much in the early stages but more as the banks situation gets too grim (too many unsold houses on hand or in jeopardy of bankruptcy.) That person will get to stay in 'ownership' of their house.
There will be some percentage of persons with no foreseeable way of keeping the house who decide to walk away. It may be tied to a job in another city they have to move to, with the knowledge that they can't sell the house in a reasonable amount of time or at a price equal to or greater than their mortgage, who can't make double payments, and who just walk away, damn the consequences.
But recent crashes show (1980s) that the number of people who don't make payments and actually get thrown out on their ears by some entity because of another entity's bankruptcy are pretty small. The banks keep trying to work with people who can make any payment at all.
There is a final likely scenario, which is that the bank in charge is allowed to sell the house to someone who has the cash or credit to buy it at a firesale price. These number of these sales are moderated by several factors; first, the sales have to get approval by the bankruptcy judge, second, the banks local interest is to not crash the values in their neighborhood since they have portfolios that will look bad if too many of their good clients can't sell their houses - a dwindling spiral, but dampened. Never underestimate their intelligence, always underestimate their knowledge.
Frank Delaney ~ Ireland
