Monday, November 22, 2010

Planning For A Strategic Default Series : Developing An Action Plan

We recently received a comment from a reader of our new book Strategic Default: How To Create A Brighter Financial Future For You, Your Family Or Your Business. The reader had asked why we did not address strategic default from a state by state perspective. The reader acknowledged that the book lays a strong foundation in preparation for a strategic default. Perhaps the reader did not understand that each person's situation and perspective is unique. On top of that each state has its own rules and laws which are changing. That said, our reader's question did open our eyes. We now understand that it will help the readers of this blog if we provide concrete steps to successfully execute a strategic default.  

The following is summary of Chapter 8 of Strategic Default: How To Create A Brighter Financial Future For You, Your Family Or Your Business. The title of Chapter 8 is The Process. The chapter provides a step-by-step guide of what is necessary to initiate and survive a strategic default. Here is the summary from the chapter:

  1. Prepare and review your Action Plan. Determine the WHY and WHAT YOU EXPECT TO ACHIEVE.
  2. Prepare and review your income, expense, available cash, current assets and liabilities.
  3. Gather all of your loan documents.
  4. Prepare a log to keep track of all communications with the lender or creditor.
  5. Apply the Strategic Default principles and understand the risks.
  6. Hire the necessary professionals: attorney, accountant or tax specialist, and real estate brokers.
  7. Become familiar with federal and state rules regarding foreclosure actions. Each state has rules regarding foreclosure. Keep in mind a lender can sell the debt to a third party collector.
  8. Prepare a time line.
  9. Send a RESPA Request Letter (form) by certified mail to the lender and request your loan documents, a financial transcript of all payments, charges, fees, legal fees, escrows, proof of proper ownership of debt.
  10. Prepare to successfully negotiate a loan modification, principle reduction, short sale, deed-in-lieu. If a foreclosure action begins make sure your respond, in writing. Get a lawyer or go to the court if you are not comfortable representing yourself. Always fight back.
  11. Plan to move out of the property, or stay in the property after the foreclosure auction and negotiate the eviction notice. There may be state laws or federal laws that allow you to stay.
  12. Prepare for a possible deficiency action.
The implementation and resolution of all of the above steps can take a year or more. This raises an important principle from the book which states: 
  • 8. A Strategic Default Is Measured in Years, Not Days or Months. Any decision to walk away from debt begins a long process. The process can last years. It can take a lender or creditor a year or more to foreclose on a property. It can take you three to four years to repair your credit. It can take a year or more to pay back a debt. It can take a lender or creditor a year or more to win a court action to collect money. You can live in your property, payment free, for a year or more before a lender can successfully foreclose. It can take a year or more before you regain your personal and financial confidence. A lender or creditor can spend a year or more trying to collect a debt through a long process involving letters, phone calls, and/or legal action.
So it's extremely important to maintain a long term perspective when planning and implementing the steps for a strategic default. It's important to stay focused on the primary objective and gather information on the objective. What may happen while gathering information is...You may decided to go in a different direction. 

Let's talk about the first step. The first step is to create an Action Plan. The Action Plan will help you organize your thoughts so you stay focused on your primary objective. The Action Plan is organic. It changes as you change. Therefore, you will be constantly updating your plan. Your Action Plan is something you refer to during the process. The Action Plan must be in writing, whether on paper or computer. The Action Plan is a document, diary, or notebook that you can refer to. There is so much information to gather and decipher, you will see the immediate benefits of having it all in a centralized location. Let's look at a sample action plan:


Name:  John Doe

Property Address: 123 Manudal Ave, San Diego, CA 90000
Bank: JP Bank 
Our No#1 Goal: To stop making $3000 a month payments on a property that has a $400,000 mortgage but only worth $250,000. We want to live in the house for at least 10 more months with lower payments or no payments at all. We plan to move into a rental in the neighborhood. 

A List of Our Objectives & Steps To Get There:
  1. Ask JP Bank to lower monthly payment to $2000 a month and lower mortgage principle balance to $300,000. 
  2. Get a consultation with a qualified attorney and/or accountant who has experience working with people in my situation. Need a professional that understands the mortgage loan, debt negotiation, and foreclosure process. We can get a referral or call the local bar association. We will continue to research ourselves to learn what to do. 
  3. If JP Bank refuses to negotiate with us we will prepare to stop paying. We want to stay in the house for another ten (10) months. Need to determine if we can stay that long under California foreclosure law. How long does it take to foreclose?
  4. Be prepared to eventually leave the house if the bank will not deal with us. We understand that our credit will take a big hit. We need to find out how long it will take to get our credit back.
  5. If the JP Bank does not get all of its money can they sue us? We need to know if we are protected under California anti-deficiency, non-recourse state laws. What happens if they get a money judgment against us?  How can we protect our savings account, IRA, and second property? We will have to research the law ourselves or we need to speak with a qualified attorney who can advise us.
  6. We need to know if the non-payment of our mortgage will affect the credit limits or interest rates on our credit cards and other loans. If it does we may have to pay everything off or take out all of the available cash advance.  
  7. Be prepared to find another place to live. We know we need credit to rent or buy. What is our plan to overcome the negative credit. We may need to save up 6 to 12 months advance rent to offer to a landlord as an incentive because of bad credit. 
  8. We need to gather all of our mortgage documents and financial documents. 
  9. We need a complete understanding of all of our risks. We will research different books, resources, and talk  to qualified professionals to evaluate our strategy. 
  10. Get a copy our loan documents to make sure the bank really owns the mortgage and note. 
Keep in mind that the Action Plan should cover all of your questions and concerns about your particular strategic default. Also, you should fill in the answers to your question. You should put a check mark next to each question or objective that has been successfully answered, resolved, or completed. You should update it every few weeks since your circumstances may change and the relevant state and federal laws may change. You will stay focused on your objective if you write everything down. The process can be long and stressful. Yet when you achieve your objective it will be very satisfying. 

Keep an eye out for our next post: Planning For A Strategic Default Series: Why it is necessary to prepare a financial statement and organize all of your financial documents.  

We look forward to your comments and questions. 

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