Thursday, October 21, 2010

Got Questions? Get Answers... RH Wants To Protect His Daughter's College Fund After Strategic Default

Got Questions?

I would like to do a strategic default, however, I'm concerned that BOA will be  allowed to take my daughter's college fund, which is only $17,000, and also pursue me relentlessly for years.  Is this true for residents of North Carolina? Our home, which we paid $385,000 for three years ago is now worth $290,000,  which is less than we owe. We can just about afford to stay and pay all of our  bills but this could change if our income goes down even slightly. Thanks for any advice you can give. RH

Get Answers...

Thank you for your question.

In prior posts on this blog we have discussed the importance of understanding all of the consequences of a strategic default in order to prepare for a strategic default. 

The primary consequences of a strategic default are:

1. Deficiency debt leading to a deficiency judgment. This includes a lender deciding to sue for the entire outstanding debt instead of filing a foreclosure action. This can lead to the following results:
  • personal liability for the unpaid debt.
  • state and/or federal tax consequences for any portion of the unpaid debt that may be forgiven by the lender.  
2. Lower credit score.
3. Loss of the home or property to a foreclosure sale.
4. Recently, Fannie Mae implemented a rule that bans a person from obtaining a Fannie Mae mortgage, if that person strategically defaults. The ban last for seven years. Furthermore, the United States Government may pass a law that bans a person from obtaining a government insured loan, if it is proven that a person strategically defaults. Read this
link to learn more.
5. Debt collections tactics, including mail, letters, personal visits to the property, phone calls to cell phone, work, and/or family members. Not all debt collection tactics are legal. You should become familiar with your state’s debt collection protection laws and the Fair Debt Collections Protections Act

As always, most people like yourself who plan to strategically default are most concerned about deficiency debt. They are concerned about a lender or creditor going after their savings or investments. 

So let's review each of your concerns:

First. You are concerned that your lender may go after your daughter's college fund. The remedy for that concern is to set up your daughter's college fund in a way that the lender can't touch it. Perhaps you can create an account that's in your daughter's name alone or that's in trust for the benefit of your daughter. You need to speak to a qualified professional, perhaps an attorney, who can help you protect your daughter's money. A key principle of strategic default is to: Implement and Use Legal Asset Protection Strategies and Techniques Which Can Prevent A Creditor From Getting Some or All Of Your Money and Other Assets.

Second. You are concerned that BOA will pursue you relentlessly. Well, the fact is, a lender has the right to sue you for any unpaid money owed to the lender. Yet there are laws that govern the way a lender can sue you and how long a lender has to sue you and chase you. In other words, you must have knowledge of debt collection procedures and laws. There are rules that describe what a lender can sue you for if a property is sold at a foreclosure sale and the foreclosure sale proceeds do not satisfy the entire mortgage balance. These rules are generally covered under a states recourse or non-recourse laws. This is also covered by each states deficiency or anti-deficiency statutes. You should read this article to understand the difference between recourse versus non-recourse states. Also keep in mind that lenders do not have an unlimited amount of time to sue you. A statute of limitations establishes time limits for when a lawsuit can be filed for a particular type of legal action. If the statute of limitations passes then a lender typically can't sue. The right type of mindset is to prepare to defend against a possible lawsuit. As we always recommend, it makes sense to sit with a qualified attorney who can advise you of your exposure. You can also visit our website Debt Defense 101 to learn about strategies against debt collection. 

Third. You asked if you have any exposure under North Carolina law. North Carolina has some anti-deficiency regulations that limit a lenders ability to sue a homeowner for a deficiency judgment after a foreclosure sale. You need to speak with a qualified attorney to see if you are covered under the anti-deficiency laws of North Carolina.  You should read this to article on the difference between recourse verse non-recourse states.

We recently published a book calledStrategic Default: How To Create A Brighter Financial Future For You, Your Family Or Your Business. The following is an excerpt from Chapter 8: The Process which you may find helpful. The chapter is step by step outline on how to prepare for a strategic default: 
  • Protect and Preserve Your Cash, Savings, and Assets. A part of your strategic default plan should include consideration of asset protection. For most debts, your creditor will have to file suit in court in order to force you to relinquish any asset. However, in the case of mortgage default, you need to prepare for a deficiency debt. A deficiency debt is the difference between the outstanding balance of the mortgage note, plus costs and attorneys’ fees, and the received income of the property foreclosed. For example, let’s say your foreclosed property sells at auction for $250,000. Your mortgage balance is $325,000 and your lender claims another $5,000 in foreclosure costs and fees. That’s a total of $330,000 against the sale income of $250,000. A deficiency debt can lead to a deficiency judgment. Your lender may start a lawsuit to obtain a deficiency judgment against you for $80,000, and this can come out of your pocket. A deficiency judgment can obliterate the reason why it was advantageous for you to default: it represents about two years’ worth of future mortgage payments. Check your state law. In Florida, for example, a cash shortfall at the mortgage foreclosure sale does not automatically lead to a deficiency judgment. To obtain a deficiency judgment against you, after the foreclosure sale the lender must file a court motion for a deficiency. The court then holds an evidentiary hearing on the lender’s request for deficiency liability. At the evidentiary hearing the mortgage lender must prove that the property’s value on the sale date was less than the note balance. You have the opportunity to demonstrate that the value of the house was greater than the amount of the note, and to make your case you can introduce independent appraisals or government tax assessments...Your best bet is to hire a qualified attorney...If you have $80,000 at stake, a few thousand dollars for a good lawyer is worth it. There may be tax issues as well. If your lender forgives part of your debt, such as in a short sale, you may receive a 1099 form stating that the deficiency is personal income. But the federal Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief. This provision applies to debt forgiven in calendar years 2007 through 2012...There are other tax-related issues that may apply to you. Consult your tax specialist or a CPA for professional advice.
Also, please take time to read the article What Everyone Should Know About Debt Forgiveness, Obligations and Deficiency.  

All of your concerns are justified. The key to addressing your concerns is to be familiar with all of the risks. You need to protect your assets in anticipation of the consequences of a strategic default. You must be familiar with the relevant state and federal laws. You must be prepared for the financial consequences. You should consult with a qualified attorney and/or accountant. You need to develop a strategic default plan. 

Good luck and be well. Thank you. 

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