Should we default and let the bank have the house?

There’s a good reason to not simply walk away from the house: $125,000. A number states, including South Carolina, allow “deficiency judgments.” That means that after the bank or other lender forecloses on your house and sells it at foreclosure sale, they can sue you for the remaining balance owed under the mortgage. Based on what your write, you could lose your home and still be liable for $125,000.

No, defaulting on a mortgage is almost never the right choice. Much more preferential would be to have a mortgage debt negotiation with the bank or lender, with an eye towards coming to some mutually beneficial mortgage debt settlement. Banks are not stupid (usually); if you can show them that they can get 60% or 70% of the money without much headache or cost, versus trying to get 100% but failing (possibly incurring significant costs in the process), you may be able to settle your mortgage for less than its face value. That’s the whole idea behind a short sale, after all, and you know that banks will, when a good case is made, do those.

Banks are tough negotiators, though. An experienced attorney, who knows both what banks have been willing to accept and how best to present the offer and your financials (to prove that you need some mortgage debt relief) can greatly increase your chance of coming to some beneficial mortgage debt settlement with your lender(s). The attorney can also advise you about other options you might consider, such as bankruptcy.