Debt Defense 101: The Must Know Rules Of Debt Defense

The basic rules of Deficiency Debt Defense 101 are an ever growing list of MUST DO and MUST IMPLEMENT RIGHT NOW basic strategies in order to achieve the goal of deficiency debt defense.

Deficiency debt also known as debt deficiency arises when collateral that is used to secure a loan cannot satisfy the total amount due on the loan. It happens most often with debt involving real estate. However, it can occur in other types of collateralized loans such as car, business, and equipment loans. When a loan goes unpaid, the lender has the right to auction off the property to pay off the debt. If the lender collects less than what is owed at the sale, the shortage is called debt deficiency. A lender can turn a debt deficiency into a deficiency judgment. Please read What Everyone Should Know About Debt Forgiveness, Obligations and Deficiencies to learn more about debt deficiency and the consequences of a deficiency judgment.

The primary goals of deficiency debt defenses are to:

1. Reduce the Risk and Amount of Deficiency Debt.
2. Strengthen Your Defenses Against Deficiency Debt.
3. Lengthen The Time To Pay Back The Deficiency Debt.

A proper defense requires that you plan and prepare now. So make sure to implement all of these rules. Make sure you come back and read these rules every month. We will be adding new rules along the way. Also, each rule will be further detailed and expanded in future blog posts. We will do our best to apply each rule to a real life scenario.

In the meantime start reading and start preparing.

1. Do not ignore any legal papers. Always prepare a defense to every legal action. Always respond to a legal action in writing. It LENGTHENS the time and STRENGTHENS your defense 100% of the time.

2. Try to save every debt collection message with a live voice on your answering machine. Save messages that appear to be aggressive, intimidating, or threatening.  It may be useful if you need to prove a creditors improper tactics. Make sure you keep track of calls about your debts to other people or businesses.  There are creditors who may contact family, friends, or business associates. This must be stopped. You can use a cease and desist letter to try and put a stop to phone call communications. 

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...

Collection Tactics Monitor: October 9, 2010

In our previous Collection Tactics Monitor: October 6, 2010 post, we talked about a debt collection technique employed by a company called Heritage Pacific Financial. Please read the prior post so you can put this post into context. Since that post, we received the following email:

"Hello, I am writing you on your article http://www.debtdefense101.com/2010/10/collection-tactics-monitor-october-6.html. I am pretty much in the same case than “Kim” except Heritage Pacific took it a step further and filed suit against me. More or less the same Boiler Plate FRAUD complaint. I’m in process of hiring an attorney to respond to this and ask the court to dismiss this case (plus their Statute of Limitation is expired). I wonder if the hundred of people being victimized by this company http://hpdebtexchange.com/ couldn’t unite and counter-sue or get them close down business…Best, PK"

So assuming that PK's email is true then Heritage Pacific believes one or all of the following:

The Must Know Rules of Debt Defense

The basic rules of Deficiency Debt Defense 101 are a ever growing list of MUST DO RIGHT NOW & MUST IMPLEMENT RIGHT NOW!! in order to achieve the goal of deficiency debt defense.

The primary goals of deficiency debt defenses are to:

1. Reduce the Risk and Amount of Deficiency Debt.
2. Strengthen Your Defenses Against Deficiency Debt.
3. Lengthen The Time To Pay Back The Deficiency Debt.

A proper defense requires that you plan and prepare now. So make sure to implement all of these rules. Make sure you come back and read these rules every month. We will be adding new rules along the way. Also, each rule will be further detailed and expanded in future blog posts. We will do our best to apply each rule to a real life scenario.

In the meantime start reading and start preparing.

1. Always respond to a legal action in writing. It LENGTHENS the time and STRENGTHENS your defense 100% of the time.

2. Save every debt collection message on your answering machine.

3. Save every debt collection letter mailed.

4. Always send a RESPA request letter to determine if lender or creditor 
still has the paperwork and can prove that it has the right to collect.

5. Send all letters to lender via certified mail (no return receipt is necessary) and regular mail. Always mail one letter to the lender’s designated address and to the lender's corporate office.

6. Become familiar with your states anti-deficiency laws. In states that allow deficiency judgments make sure you know the rules and, if necessary, speak with qualified counsel.

7. Keep in mind once a deficiency judgment is obtained it can last as long as twenty years.

8. Avoid fraudulent conveyances at all costs.

9. Learn strategies and techniques to legally shield your assets from creditors. Use legal strategies and techniques that do not expose you to fraudulent conveyance.

10. Never ignore a foreclosure action or any other lawsuit to collect on a loan. Always respond in writing.

11. Make it a habit to send a complaint letter to the bank each and every time you are treated improperly, unreasonably and disrespectfully. Make sure to detail the particulars of your treatment.

12. Never accept any verbal agreement with a lender or creditor- always insist for evidence in writing.

13. Always seek debt forgiveness or forgiveness of debt in writing when negotiating a principle reduction, deed in-lieu, or shortsale.

14. Always ask for a principle reduction as part of any debt negotiation, workout, or modification strategy. If the lender says “NO” ask for the reason in writing or ask for the lender's principle reduction policy in writing. If the lender does not have it in writing, then send a letter confirming the conversation rejecting the principle reduction. Make sure to put the time, date, and representatives identification number in the letter.

15. Always send a letter demanding a complete financial history of all payments and charges as it relates to your debt.

16. Use a “do not call” letter as a means to stop harassing phone calls. This letter must be sent several times via certified mail and regular mail.

17. Keep a detailed diary of any negotiation discussions with the lender and mail a copy of your notes to the lender “once a month”.

18. The same defenses that is available in a foreclosure action area available in a deficiency judgment action.

19. Remember to read any document that requires a signature. Keep a look out for any clause or sentence that says you "waive" or give up any of your rights or defenses against the loan or the debt. Make sure you have the clause or sentence removed.

20. Be aware that 3rd party debt collection agencies are purchasing deficiency debt for cents on the dollar.

21. Be prepared to negotiate any deficiency and/or outstanding debt with a lender, After all, you cannot blame a lender for trying to collect on a loan.

22. Become familiar with your states and the federal government fair debt collection rules and regulations. A violation of the laws can be a strong defense to a deficiency debt legal action. A violation of any of the appropriate state and/or federal laws can potentially offset the amount you currently owe.

23. Speak to a qualified attorney or legal agency regarding the use of bankruptcy to eliminate deficiency debt. Seek the advice of a qualified attorney, legal aid organization and accountant regarding the risks involved with defending deficiency debt.

24. Just because you borrowed the money does not mean you can’t use legal means to pay less than what you owe or gain more time to pay.

25. Make it a habit to constantly challenge all fees, interest, costs and charges. Ask the lender to send written proof establishing it's right to collect the debt.

26. Demand that any third-party debt collector provide proof of the ownership of any claimed debt.

27. Never send a lender more information than what the lender asks for.

28. Always assume that the collection of debt is improper or invalid, even if you borrow money. Remember, you are challenging the collection tactics and you are challenging the amount owed. 

29. If you are in court for a debt collection case, always ask for discovery. This is a process that allows you to request documents proving the lawsuit and loan. It also allows you to question the debt collector, live in person, and on the stand. If, during the debt collection case, the debt collector does not produce the documents or an individual to testify, then ask for a DISMISSAL WITH PREJUDICE. 

Got Questions? Get Answers...BSE Wants To Walk Away From Two Investment Properties in Vegas

GOT QUESTION?

This question has to do with two properties I own in Las Vegas. Briefly , they are two townhomes in the same develpoment w/ mortgages by two different lenders. Both are intrest only ARM's due to adjust in 2012 and 2013. I've owned them since 2005 and they are currently worth 50% of what I paid. Principe balance on one is $204,000.00 and $172,000.00 on the other. I'm current on both and they are rented but with neg. cash flow. I sold my buisness in 2004 and all of the note payments from the sale of my buisness has gone into these two properties. When these mortgages adjust I most definately will not be able to afford them. My wife and I are both on the notes, she is currently employed and I work part time on a cash basis. We also own our home her in New York as well as a commercial property. The lenders won't talk to me until I miss at least three payments, I'm condisering walking away. What are the potential consequences? By the way I put down $50,000.00 on each of these properties.

Thanks for your help!

BSE

GET ANSWER…

Dear BSE:

Thank you for writing.

First of all, you and your wife are equally liable and equally responsible for the mortgage loan since you both signed the note. A lender or creditor will not differentiate between who signed the note first or last, as long as it has been signed by each party.

The primary risks of a strategic default are:

1. Deficiency debt leading to a deficiency judgment.
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. Read this link to learn more.

My experience has established that most people who strategically default are most concerned about deficiency debt. Most people do not want to be chased down for more money by creditors or lenders.

Let’s go through deficiency debt issues carefully. A deficiency debt also known as debt deficiency arises when collateral that is used to secure a loan cannot satisfy the total amount due on the loan. The unsatisfied amount due on the loan is a deficiency debt.

A deficiency judgment is an unsecured money judgment against a borrower whose mortgage foreclosure sale did not produce sufficient funds to pay the underlying promissory note or mortgage loan, in full. A deficiency judgment can be obtained when there is a deficiency debt.

You mentioned that your properties are in Las Vegas, Nevada. Nevada is a recourse state. That means a lender has the right to seek a deficiency judgment. A lender must file for a deficiency judgment in a certain period of time after a foreclosure sale. Please read this link to learn more.

If a lender or creditor forgives the deficiency then you will not be exposed to a deficiency judgment. When a lender or creditor agrees (IN WRITING) to forgive a debt as opposed to seeking a deficiency judgment, then the forgiven debt may be considered income by your state taxing authority and the IRS. Forgiven debt is income.

Under current Federal Law if a debt is forgiven on a primary residence then there is no tax due to the IRS. However, your properties are investment properties so it is unlikely you can benefit from the rule.

There are ways to minimize your risks of a deficiency judgment:

You can negotiate a principle reduction. This is when a lender or creditor agrees to reduce the principle balance of a loan. You can ask the lender to forgive the difference (IN WRITING) as part of the negotiation.

You can negotiate a deed-in-lieu. This is when you enter into a written agreement to give the property back to the bank. The key is to negotiate a full settlement of your total outstanding mortgage debt including fees and penalties in exchange for the deed to your property. A full settlement of your total outstanding mortgage debt eliminates a deficiency and tax liabilities. A partial settlement still leaves open the possibility of a deficiency judgment or forgiveness of the remaining balance.

You can negotiate a short sale. This is when a lender let’s you sell your property for an amount less than what is owed on the mortgage. Essentially your lender may be willing to accept less than the full amount due on a mortgage. If you owe the lender $400,000 then the lender may agree to let you sell the property for $350,000.

In all these cases you must get the lender to agree to forgive the deficiency.

Beware of the Turn In Your Financial Documents Trap. This happens when the lender’s representative asks you to turn in your financials via telephone or fax in order to see if you qualify for a loan workout, principle reduction, deed-in-lieu, or short sale. Before you agree to turn over your financial documents ask the lender to send you something in writing stating that they will seriously consider a work out option if you turn over your financials. Or ask the lender to direct you to their website regarding their loan workout processing rules. The problem I have is this: What happens to your financial documents, if your lender refuses to negotiate a loan workout? Can the lender use this information against you? For example, can the lender use the information during a foreclosure action or during a lawsuit seeking a deficiency judgment? In order to collect on a properly obtained deficiency judgment, the creditor or lender must locate your bank account, or locate your investment account or locate your place of employment or locate any other asset that has value. I don’t think anyone wants to turn over their financial documents to be used in any way to take their money.

If you do decide to turn over financial documents to the creditor or lender, then cross out all of the account numbers. If the creditor or lender refuses to work with you after you have turned over your financial documents then immediately move all of your money and your investments to another financial institution. Only turn over what the lender asks for nothing more.

A creditor or a lender has the right to garnish wages if it properly and legally obtains a deficiency judgment in a court of law against a person who entered into a legal loan agreement with the creditor or lender. Your wife could be exposed to wage garnishment if the creditor or lender successfully obtains a deficiency judgment against her.

Keep in mind that even if a creditor or lender successfully obtains a deficiency judgment, it does not mean all is lost. You can negotiate a settlement with the creditor or lender. The creditor or lender may take 50% or less than what is owed instead of spending time in court. Also keep in mind to NEVER LET A LAWSUIT FOR A DEFICIENCY JUDGMENT GO UNDEFENDED. NEVER IGNORE THIS TYPE OF LAWSUIT. The simple reason is that you may stop the creditor or lender from getting a judgment or you may be able to use your defense to this lawsuit as a means to negotiate a settlement.

A critical decision is how to protect your assets. There are various tools and strategies that can be employed to legally protect or hide your assets from a creditor. Keep in mind there is a rule called fraudulent conveyance. Essentially, a fraudulent conveyance is when a debtor transfers their assets in a way to prevent a creditor from collecting on a debt. There are specific rules regarding fraudulent conveyance, so this should not prevent you from properly protecting your assets.

Unfortunately, you will lose your initial $50,000 investment. However, you should speak to an accountant to determine what happened to your cash investment if the property is sold at a loss.

You should seriously consider working with a qualified real estate broker, attorney and/or accountant in order to understand your specific risks.

You have much to consider. I am confident you are on the right track.

Please feel free to write me at anytime.

Sincerely,

Augustine A. Diji

FAQS : Personal Debt Obligation vs. Debt Forgiveness vs. Deficiency Debt. What’s the difference? The Difference Can Cost You.

What is a personal debt obligation?
A personal debt obligation is an amount of money legally owed to a lender that arises from a loan agreement. It involves a continuing obligation to make payments until the debt is paid off in full. A lender has the right to sue in order to collect any unpaid outstanding debt. A debt obligation can be secured or unsecured. A secured debt obligation involves the placement of a lien against the debtors’ property, so a lender can force the sale of the property to pay off the debt. An unsecured debt obligation has no security against the debtor’s property which means a lender can only sue a debtor personally to recover any monies due.

What is debt forgiveness?
Debt forgiveness is the partial or total forgiveness of a debt. It means you no longer owe the debt to the lender or any other party. The lender gives up its’ rights to collect the debt and instead “writes it off” their books. Once a lender agrees to forgive a debt, the lender will report the forgiveness to the IRS by filing a 1099.

What is a deficiency debt?
Deficiency debt (aka deficiency) arises when collateral that is used to secure a loan cannot satisfy the total amount due on the loan. It happens most often with debt involving real estate however it can occur in other types of collateralized loans such as car, business, and equipment loans. When a loan goes unpaid, the lender has the right to auction off the property to pay off the debt. If the lender collects less than what is owed at the sale, the shortage is called debt deficiency.

What are the consequences of a personal debt obligation?
You will continue to owe the original amount that was borrowed plus any additional interest, late fees, collections fees, penalties, and/or attorney fees that may come due. If the debt obligation remains unpaid, then the lender can go to court, sue for a money judgment, get a money judgment, and use any legally available collection tactic. Most often, after a money judgment is awarded, a lender will attempt to put a lien on a bank account or garnish wages or put a lien on the debtor’s real estate. A lender can put a lien on business equipment. A debt obligation that turns into a money judgment can last for many years. In New York, a money judgment last for 20 years.

What are the consequences of debt forgiveness or debt deficiency?
Whether it is debt forgiveness or debt deficiency, the consequences are essentially the same. A lender has several choices regarding any unpaid debt. The lender can forgive the debt or the lender can get a court ordered money judgment to chase the borrower for the money or the lender can sell the debt to a third party.
If a lender agrees to forgive the debt, the lender will, in all likelihood, file a 1099. You should also check your state taxing authority, since your state may consider debt forgiveness as taxable income.

If the lender refuses to forgive the unpaid portion of a debt, then the lender will try to collect on the remaining balance. The lender can hire an attorney to sue for the remaining debt or sell the debt to a third-party. If successful, a lender will get a money judgment. There are various methods a lender can use to enforce collection of a money judgment. They can request your financial records to see if you have a job; to determine if you possess cash in the bank; or to locate your property. If the lender can find anything you own or earn, it will be seized or attached. The lender has the right to collect a fixed percentage of your wages aka wage garnishment. By the way, the lender does not need you permission to garnish your wages. The lender simply contacts the payroll department and demands that a portion of your salary go to the lender.

When there is a debt deficiency from the sale of a property, the lender can forgive the difference or try to collect the difference. A deficiency debt becomes a new personal debt obligation unless a lender forgives the deficiency. Sometime, a lender will demand a property owner sign another loan agreement for a deficiency debt. The IRS and some states offer tax relief to homeowners who have their debt deficiency forgiven. There is more information provided ahead about tax relief in this FAQ.

In our day and age, debt collection is big business. Technology makes it easier to find anyone and makes it easier to find everything an individual earns or owns. There are third party companies purchasing personal debt obligations and/or deficiency debt from lenders. These third party companies may pay 10 to 20 cents on the dollar for the debt. Once the third party company owns your remaining debt, under most circumstances the third party has the same collection rights as the original lender.

Why does a lender issue a 1099 after debt forgiveness?
Debt forgiveness is considered taxable income by the IRS and by certain state and municipal taxing authorities. The IRS requires a lender to report the forgiven debt on form 1099-C, Cancellation of Debt. Individuals are required to report any forgiven debt on Form 1040. For example, let’s say Mr. Jones originally borrowed $250,000 from the lender. The lender decides to forgive $150,000. Basically telling the debtor he or she does not have to pay $150,000. The IRS believes that since you did not have to pay back the entire loan, then you ended up keeping the money, therefore it is income.

What if I own a property with a value less than the mortgage balance, can the difference be forgiven through a short sale or a foreclosure auction? Can the difference become a deficiency debt? Will the IRS let me exclude forgiven debt and not look at it as income?

The general answer is yes to all of the questions. If a lender agrees to a short sale, the uncollected difference can be forgiven or it can become a personal debt obligation. If the lender forgives the difference then the amount forgiven can be considered taxable income. If the lender refuses to forgive the difference, then it becomes a personal debt obligation. This means a lender or a third party (who buys the debt obligation from the lender) has the right to legally pursue you by getting a court ordered money judgment.


If your home ends up selling at a foreclosure auction for less than what is owed, the uncollected balance is called a deficiency dent. A deficiency from a foreclosure action can be forgiven or can become a personal debt obligation. Various states have anti-deficiency statutes. These statutes prevent a lender from collecting on a deficiency. Also, the federal government enacted the Mortgage Debt Relief Act of 2007. The Mortgage Debt Relief Act of 2007 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, may qualify for the relief. The act applies to all applicable debt forgiven between 2007 and 201. It applies up to $2 million for joint filing and $1 million if filing separately. Make sure you read the act and get a qualified professional to analyze your specific situation.

The IRS has additional exceptions to the “debt forgiveness is income” rule. The most common situations when cancellation of debt income is not taxable involve qualified principal residence indebtedness, bankruptcy, insolvency, certain farm debts,non-recourse loans and other exception established by the IRS. You need to speak with a qualified accountant or other professional, so you understand your tax obligations.

What are anti-deficiency laws?
Simply put, an anti-deficiency law prevents a lender from collecting on a deficiency debt or places limits on how much a lender can collect on a deficiency debt.
A homeowner will not be held responsible for any deficiency if the property is occupied by homeowner. Basically, the property must be the homeowner’s primary residence. The lender can only recover the property and any proceeds from a foreclosure auction sale.

Anti-deficiency laws do not prevent a lender from reporting the deficiency to the IRS. Since the lender is generally prevented from collecting the loss on a sale, the lender can report the loss to the IRS as forgiven debt.

You can contact your states attorney general or banking department to learn about any deficiency laws. You can contact a qualified attorney. There are certain states that limit a lender to only one lawsuit to collect a mortgage loan debt. So makes sure you get a professional opinion about your state laws.

What happens If I Settle A Credit Card or Business Loan For Less Than What’s Owed?
If negotiated properly a credit card company or lender may agree to settle a business loan or credit card debt. Normally, the unpaid balance should be forgiven. This brings up an important principle. In order to get debt forgiveness, it must be in writing!!. Keep this in mind. Just because the lender verbally tells you the debt is forgiven does not mean it is forgiven unless it is in writing. There are instances when a debtor is told the debt is forgiven only to get aggressive collection calls sometime in the future.

How can I determine what is best for me?
Ask yourself “What am I trying to achieve, what are my goals?” Your answer should focus on what puts you in the best financial position in the short and long term. The focus should be on reducing your debt obligation with limited long term negative financial impact. If debt is forgiven, then you may have a tax bill. If the debt becomes a money judgment, then wages can be garnished or certain assets can be seized. You will need a qualified team of professional advisors to assist you or you need to do a fair amount of research. Your advisors can include an accountant, attorney, and/or a consultant.

Each person’s circumstance is unique. It requires spending time listening, gathering detailed financial information, reviewing all necessary documents and discussing various strategies.

Now you know so take control.