Hi. My husband and I are thinking about walking away from our home. We live in Illinois and purchased our home in 2005 for $157,000. In December of 2006 we got a 2nd mortgage HELOC of $18,000. Maxed that on credit card debt and medical bills. In January of 2010 I lost 10% of my pay because of the recession and my husband would work over time all year up until then too. So we lost all that money as well. We were very dependent of his OT. We fell behind on our 1st mortgage. The most was 3 months behind. Finally in November 2010 we got approved and accepted a loan modification on our 1st mortgage with BOA and our principal balance was lowered to $145,000 and the payments we were behind were forgiven. I never notified my 2nd bank HELOC or ever fell behind on payments with the 2nd loan. I am only paying the minimum interest payments. My 2nd loan is with my Credit Union that I have banked with for 20+ years (dont know if that matters). Oh and the loan they gave me as the HELOC, would need to be paid back by end of 10 years. Well that isn’t going to happen. So now I have fallen 1 month behind on my 1st mortgage with BOA. Still paying my 2nd on time. Have looked on zillow.com to see that my home is currently worth on their website $91,700. It needs a ton of work not to mention. Needs a new kitchen as I think its the original kitchen from when the house was built in 1960. The bathroom is full of mold and the basement is 1/2 finished. And also, my husband and I have maxed out our credit cards AGAIN which is about $10,000 total. I need a new car as the one I have has 198k miles and my husband and I just purchased a used one last year that we still owe $5k on. We are thinking of just buying a new car for me and then just walking away. We don’t think it’s worth paying for something that is worth almost 1/2 of what we owe on it and not to mention the additional money it needs to fix it up. I'd like to actually pay off my credit cards when I walk away, but don’t know if just filing for bankruptcy for everything EXCEPT the cars would be best.
Can you help me? I so look forward to your advice.
Thank you for writing to us.
In our previous posts, we placed an emphasis on understanding the financial risks and consequences of a strategic default. Before we discuss the risks and rewards, let’s focus on what you want to achieve. In other words, what do you plan to gain from a strategic default? Our site has always maintained that the primary purpose of a strategic default is to preserve cash, savings, and wealth. Ultimately your goal should be to place you, your family and/or your business in a better financial position.
In your situation it appears that by strategically defaulting you will free up available cash for other uses.
First things first. You need to develop a sense of direction. This will help you put your mind at ease. As you gain a better understanding of your objectives you will gain confidence. With confidence, you be will able to execute an optimum strategic default based upon you unique circumstances.
You will need to create an action plan. A well thought out action plan will help you better allocate time and resources towards a strategic default.
In our strategic default guidebook, we discuss the various parts of an action plan and the steps to successfully initiate your action plan. You will also find posts on this website outlining various key steps for creating an action plan.
So get pen to paper and ask yourself the following questions:
- How much money will you save if you strategically default and what will you do with the extra cash? How do you make this extra money work for you?
- If your first mortgage lender does not get all its money at a foreclosure sale will you face a deficiency judgment under Illinois law? At this time Illinois allows lender’s to obtain a deficiency judgment. You should research Illinois law on deficiency judgments. You should consult with a qualified Illinois attorney if you are not absolutely clear about your legal rights during a foreclosure action. Please read What Everyone Should Know About Debt Forgiveness, Obligations and Deficiencies to learn more about debt deficiency. Please read this article on the Difference Between Recourse and Non-Recourse States to learn more about anti-deficiency rules and regulations.
- What do you intend to do with the second mortgage/HELOC with the credit union? Are there benefits banking with your credit union? If yes, then you should plan to pay the entire debt. Keep in mind the credit union is most likely aware that it will not collect any money from a foreclosure sale? This mean the credit union may sue you personally for the HELOC if you do not pay the debt. Did you know that second mortgages and HELOCs can be settled for less than what is owed? If and when you decide to stop paying the HELOC, make sure to first contact the credit union to learn about various loan workout options.
- What about your credit cards? You mentioned bankruptcy? Did you consult with a qualified bankruptcy attorney or professional in your home state to determine if a bankruptcy makes sense? Did you know that you can settle credit cards for cents on a dollar? Also, you can settle your medical bills for less than what is owed. Contact your creditor to see if they will accept a settlement. Your mantra should be “I know I borrowed $10,000 but I also know I can negotiate a settlement for $5000 or less.”
- Do you want to live in your property as long as possible? How long will it take for the lender to foreclose in Illinois? Check out this LINK at www.illinoisprobono.org to learn more about foreclosure and foreclosure defense in your home state. You can also consult with an Illinois attorney to learn more about foreclosure.
- Can you legally rent out a room or an apartment in your property to get extra cash flow? What about storage space? Can you legally get extra cash flow from your home?
- Do you know the difference between a short sale and deed-in-lieu of foreclosure? A short sale is when a lender allows for the sale of the property for an amount less than the entire balance due the lender. A deed-in-lieu of foreclosure is a written agreement with the lender to voluntarily give the property to your lender in exchange for a release of the note and mortgage obligation. Did you know that some lenders will pay a homeowner up to $30,000 to do a short sale?
- You should get a broker price opinion (BPO) to determine the real market value of your property. This is a market value assessment made by a real estate broker familiar with houses in your area. The real market value is what a current buyer will pay for your property. This information will help you establish to your creditor that your property has no equity especially if you decide to negotiate a principle reduction or a settlement on your HELOC.
- Where do you plan to live once you need to move? Have you explored rental locations and costs?
- Are your existing loans and/or debts still with your original lender or did your note and mortgage get transferred to a new lender? Did you send a RESPA request letter or debt validation letter to confirm ownership of your debt? Do you know the principles of Debt Defense?
- What, if any, will be the tax consequences of your actions? Did you speak with a CPA or accountant?
- Would you consider keeping the property if you can negotiate a principle reduction? In other words you can contact your lender and determine if they will negotiate a principle reduction. Remember to get any agreement to lower your mortgage principle in writing.
Now let’s look at the primary consequences of a strategic default:
- Deficiency debt can lead 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 personal liability for the unpaid debt and it can lead to state and/or federal tax consequences for any portion of the unpaid debt that may be forgiven by the lender. Currently, the mortgage debt forgiveness act waives all Federal taxes due from the forgiveness of debt. However the Mortgage Debt Forgiveness Act will expire the end of this year, December 2012. It is unclear if the Federal Government will renew the act. Once again please read What Everyone Should Know About Debt Forgiveness, Obligations and Deficiencies to learn more about deficiency debt.
- Lower credit score. Credit scoring and reporting agencies are now taking strategic defaults into account when determining credit scores. Please read this LINK more. Keep in mind that once you stop making payments your credit score will drop. This will affect your ability to purchase or rent another property. So your timing of a strategic default is important.
- Loss of the home or property to a foreclosure sale.
- 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.
- 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. Read this LINK to learn more about the Federal Fair Debt Collections Practice Act.
- You can become personally liability for unpaid balances owed to local or city municipalities for electric, water, gas, housing violations, and/or sewer and unpaid balances owed for real estate taxes. You need to be aware of any and all liabilities.
By answering the above questions your strategic default roadmap will become clearer. You will begin to take concrete action steps towards fulfilling your primary goals. A strategic default does not indicate financial failure. It is a tool for protecting your cash and assets for the benefit of your family. It is a reorganization of your financial life. You must act as the CEO of your family and business finances.
So to your question…should you strategically default on your underwater property? The answer should be based on what course of action will put you in a better financial position. You need to put together a written action plan. It requires discipline, patience, research, and competent advice. It requires a thorough understanding of the risks and rewards. It requires a team of trusted and experienced professionals with expert knowledge. You need to understand the pros and cons of filing for bankruptcy.
Keep in mind that a strategic default, in of itself, does not eliminate debt. It is the strategies pursued during a strategic default that can reduce or eliminate the debt. You should not allow yourself to be “put to sleep” by a creditor who has not attempted to collect a debt in months or years. As long as a debt can be collected under the law then you should assume a creditor will attempt to collect the debt at some point in time. There is a principle in physics that states matter and energy can neither be created nor destroyed only rearranged. Debt follows the same principle. Once debt is created it cannot be eliminated unless it is restructured or resolved.
The successful implementation of strategic default requires you to be involved in the process from beginning to end. Your circumstances will change so you must be adaptable. Your lender will continue collection efforts. There may be changes to state and federal law that can protect you or can make things more difficult. Remember “A strategic default is measured in years, not days or months.” Therefore it requires a regular assessment of your strategies.
We have started to offer flat fee consultations. Our method is straightforward. We act as a guide and help you navigate the strategic default landscape. We achieve success by pointing you in the right direction. We help you put all of the strategies together so it makes sense. Also we are available to answer your questions on a monthly or quarterly basis. Keep in mind that we do not provide legal or financial advice.
If you would like to learn more about our personalized consultations please email us at firstname.lastname@example.org. All initial consultations are free. We provide references upon request.
Once again thank you.
A. A. Diji