My son has a home in Davenport, Florida which he paid $189,900 for in 2005. It is now worth about $70,000 according to a respected Realtor in the area. How can he start the "strategic default" process? He has a first and a second on the house and quit making payments on the first in October, 2009 and on the second in February, 2010. (Dates are approximate) The first is held by Chase and the second by Bank of America.
Well technically he started the strategic default process the moment he stopped making payments. Your son had the money to pay but did not want to waste the cash on a worthless asset or did not have the ability to pay.
Here are some initial questions:
What does your son want to achieve? Is he looking for a loan modification or principle reduction? Has he talked to the bank? Does he want to let the property go with the least exposure? Does he live in the property or is it an investment rental? Does he need time to live in the property before moving? Does he know that it can take a year or more to complete a foreclosure in Florida?
At this point his options are: Foreclosure, Deed-In-Lieu, Short Sale, Bankruptcy & Loan Modification. All of these options will negatively affect his credit score in difference ways. Obviously at this point since he stopped paying his credit should not really be an issue. It is my opinion that he should choose the option that provides the least financial exposure after he strategically defaults. The issue of bankruptcy is that it stays on your credit for 10 years and there are certain financial requirements (“means test”) to qualify. Your son should speak with a qualified attorney if he is exploring the bankruptcy option.
I ask all of my readers to read this article: What Everyone Should Know About Debt Forgiveness Obligations and Deficiency.
One of the most important aspects of strategic default is to understand the consequences of any remaining debt (deficiency) after a strategic default.
Your son’s number one goal should be to minimize the financial after effects after the strategic default. This means his goal is to owe the lender little or no money after he has let go of the house.
Keep in mind that in most circumstances the second mortgage never gets satisfied no matter what plan your son decides to implement. He must be prepared to negotiate a deal with the second mortgage lender so the debt does not follow him.
Most importantly, make sure your son understands that strategic defaults are not measured in days or months. It is measured in years. He needs to be prepared for the letters, phone calls, and collection harassment. In time it will work out for him.