Thursday, May 13, 2010

Got Questions? Get Answers...From Underwater In Phoenix


In addition to my primary residence in the Bay Area, I have 3 rentals, 2 in Phoenix and one in San Diego, an inheritance which is free and clear. As a single unemployed woman paying 3 mortgages, with declining earning power offset by inflationary prices, I feel trapped, overwhelmed and weighted by paying into a black hole - - I will be dead before I see this as a positive investment. It doesn't make sense to me to keep paying, but I am so frightened to lose my 800 credit score and for unseen consequences down the road.

I can understand that the unforeseen consequence of strategic default can create quite a bit of nervousness. Yet with knowledge and patience, and the right team you can handle what’s in front of you.

Remember the minute you default on any mortgage, credit card, or loan payment your credit score will drop. Most negative credit stays on a report for 7 years. You can rebuild your credit during that time.

Keep in mind that despite what’s ahead you need to do your math.

Here are answers to your questions:

If I stop paying on one of my mortgages, what can the bank do to recover their losses?

A bank will declare your mortgage in default. The bank will most likely start a foreclosure auction to force the sale of your property to pay off the mortgage. If the bank sells your property at a foreclosure for less than what is owed then this will create a deficiency. Normally, the bank has the right to collect the deficiency or forgive the deficiency. California and Arizona are non-recourse. This means to a certain extent these states prohibit the creditor from seeking more than the collateral used to secure the loan. For example if a you owe a lender a $100,000 deficiency after the completion of a short sale or a foreclosure sale, the lender cannot get the money from you. Be aware that this principle may not apply to investment property, only your primary residence.

Can they come after my 401K? Other properties?

A bank or a creditor cannot seize your 401K as long as you didn't put money into there to intentionally avoid the creditor (which is very hard to prove). However, a bank or creditor can garnish wages, put a restraining order on a bank account, place a lien and eventually seize any personal or real estate asset you own. However, in order to do this the a bank or creditor must properly complete a legal process and obtain a proper court ordered judgment. This takes time depending on where your assets are located. Furthermore, you have the right to defend yourself against any action to get a judgment or seize any asset. You can challenge the method a bank used to collect the money or challenge the paperwork in the possession of the bank or challenge the exact amount that is owed.

Do Not Keep Your Cash or Savings In The Same Bank That You Owe A Debt To! For example Chase can take money from your savings if you are in default on a Chase credit card or loan.

What financial ramifications will I have down the line with a short sale?

If the bank agrees to let you sell your property at an amount less than what you owe the bank, then this difference will create a deficiency. The bank has the option of forgiving the deficiency or seeking to get you to pay the balance.
Keep in mind that you should negotiate debt forgiveness with a lender and you should always get it in writing.

Remember what I said about non-recourse states.

Will I continue to owe taxes?

You will not owe any property taxes after the property is sold to a third party or sold at a foreclosure action. You are responsible for taxes while you own the property. As I mentioned before if a lender or creditor forgives any amount of a debt owed, the forgiven amount can be considered taxable income by your state and by the IRS.

Is there a government consumer group I should be working with?

There are many reputable organizations you can work with. There are local organizations and national organizations. I recommend that you contact several organizations to see which one can best help you. I have met quite a few people who have worked with NACA – Neighborhood Assistance Corporation of America. Just remember to speak with several organizations in order to get a good fit.

Please make sure to read these links and the questions below:

Please visit this link to review common questions to ask when faced with a similar situation.

Read this link about debt deficiency so you are familiar with all of its implications.

Read this link to learn more about Non-Recourse and Recourse States.

Good luck!! I hope this helps.

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