Saturday, July 2, 2011

Planning For A Strategic Default Series : Putting Together Your Financial Snapshot and Gathering Documents

In our last post in our Planning For A Strategic Default Series we wrote about the importance of Developing an Action Plan before initiating a strategic default. We are now going to focus on preparing an income and expense form and gathering documents. These are steps 2 and 3 respectively of Chapter 8 from our guide book Strategic Default: How To Create A Brighter Financial Future For You, Your Family Or Your BusinessChapter 8 provides an introductory step-by-step guide on how to successfully initiate and complete a strategic default. 

If you are like most strategic defaulters, in addition to owning underwater property, you possess other types of debt such as school loans, business loans, credit cards, and home equity lines of credit.  

Remember. The primary objectives of a strategic default are cash flow protection, savings preservation, and wealth protection. So putting together a financial worksheet and keeping proper records is an important step towards your objectives. All of these objectives point to one inescapable conclusion. Your ultimate objective is to be in a better financial position by the end of a strategic default.  

So let's take a look at steps 2 and 3.

Step 2 requires you to prepare an income, expense, assets and liabilities form. The income, expense, assets and liabilities form is snapshot of your current financial standing. This form contains a lists of: 
  • your monthly income from all sources.
  • your monthly expenses. 
  • a list of all assets. This includes real estate, businesses, intellectual property, and personal property. You should have a general idea of the value of your assets.
  • a list of all of your liabilities. This includes any debt that you have co-signed or you are a guarantor.  
Some individuals may decide to strategically default on all of their debt. Whatever the decision, keep these 3 principles in mind.

All debt is interrelated during a strategic default. The additional money saved from not making mortgage payments can be used to payoff a credit card or make payments on another debt. A strategic default on one debt could cause another lender to freeze credit access, even if there is no default on that debt. 

There is another principle to keep in mind. 

Learn how to generate more money with the money saved during a strategic default. A portion of the additional money saved from not making mortgage payments or any debt payments should be used to generate  additional income. Your goal is to use some of the additional money to make more money. One day it may be necessary to pay back some or all of any unpaid debt. You will need to research any investment option thoroughly. You may also need the assistance of a qualified financial consultant or investment adviser. 

Plan on settling debt for less than what is owed in order to improve your financial position. Presently, lenders and creditors are seeking to unload existing debt for less than what is owed. Remember that the debt problems experienced by you are also experienced by lenders. Like you, lenders are motivated to protect their financial positions. Lenders would rather have some money now then no money at all. Especially from borrowers who strategically default!!! 

For example, let's say you borrow $100,000 and settle the $100,000 balance for $50,000. The $50,000 unpaid difference will become a deficiency debt. Normally, you will ask the lender to forgive the deficiency debt. If the lender agrees to forgive the balance of the unpaid debt then you may have a potential tax bill since forgiven debt may be considered income for tax purposes. So in our previous example let's say that your tax bill is $10,000 for the forgiven balance. In the end you would have borrowed $100,000 for a cost of $60,000 ($50,000 settlement plus the $10,000 forgiven debt tax bill). This is a $40,000 gain less any interest payments, costs, and fees all ready paid to the debt. 

You will be in a better financial by settling all of your debt for less than what you owe. 

Step 3 discusses the importance of keeping a record of all of your documents. Most people get into a habit of throwing away letters. Don’t do it. Find some time to purchase a file storage box. Make sure that everything that involves your debt is placed into that box. Make sure to keep track of phone calls. This includes getting the name, ID number, and the purpose of the call. If a lender calls you too frequently or harasses you at work, you can use a cease-and-desist letter to stop the calls. There are strong state and federal state debt collections laws which prevent improper debt collection procedures. Please visit this link about the Fair Debt Collections Practices Act to learn about your rights. Your records may become necessary to dispute an improper negative item on your credit report. During a strategic default your credit is essentially meaningless, however you should plan to repair your credit once you can consistently make on time debt payments. 

It's important to keep records of all negotiations with lenders. This includes applications for loan modifications, forbearance agreements, or debt reduction negotiations. These records can come in handy during a foreclosure process as proof that your lender did not deal with you in good faith. If you have been unfairly and improperly denied a loan modification perhaps a court will assist you in getting one. It may be a defense to a foreclosure case. 

The steps outlined in this post are an important step towards creating a brighter financial future for you, your family and your businesses. Your ultimate goal is to end up in a better financial position. 

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