With the state of the real estate market these days, many borrowers find themselves owing more on their property than the property is currently worth. That makes it tempting to just walk away. However, many borrowers fail to consider the potential consequences to this action.
In the State of Ohio, when a lender forecloses on the typical mortgage, if the sale of the property nets less than the outstanding balance on the loan, then the lender will receive a deficiency judgment. The lender can then choose to collect on that deficiency judgment by initiating standard collection actions such as seeking garnishment of wages or obtaining a lien on other assets. Many borrowers fail to realize that personal assets can be at risk if they default on their mortgage. [Note: Some commercial loans may be non-recourse to the borrower, but that is not being addressed in this post.]
One exception would be if the lender agreed with the borrower to accept a deed-in-lieu. Under this scenario, the borrower would not be obligated for any deficiency balance. However, whether a lender would be willing to consider accepting the deed-in-lieu depends upon the value of the mortgaged property and/or the borrower's ability to pay. A borrower with the ability to pay will find any request to accept a deed-in-lieu falling on deaf ears unless the value of the mortgaged property is sufficient to cover the balance on the loan.
In the event that the value of the mortgaged property is less than the outstanding loan balance, the lender will likely request that borrowers with an ability to pay execute a new promissory note for repayment of all or a portion of the deficiency amount.
One last item to consider: Just as debt forgiveness in general is taxable income to a debtor, the uncollected deficiency balance would be considered income to the borrower, and a 1099 can be issued by the lender. This results in taxes being owed by the borrower to the IRS on that deficiency balance which the borrower failed to repay.
4 comments :
And I just read recently that about 26% of foreclosures are "strategic defaults" or in other words, people who simply walk away because they don't want to keep paying, not because of hardship.
In additional people who "choose" to walk away should also know that it will be reflected in their credit report and documentation for many years to come. Anyone who has a strategic foreclosure, will have trouble getting a mortgage in the future. It will be quite obvious that they simply choose to walk away, as opposed being a victim of financial hardship out of their control.
Not to mention what you are doing to your friends and families property values, by adding yet another foreclosure to the markets.
Please think about the consequences of your actions before you choose to walk.
James Mucci
Michigan refinancing
I think it's not that they fail to consider these consequences but that they take a chance because banks didn't always do all they could do. Or else, they're so much under water that it makes sense mathematically.
Besides, refinacings and remortgages are hard to get these days. They might end up at the same point in a few months anyway.
Walking away from a home is not a solution, it's similar to escapism.
Thanks dear,
It is very helpful to us.
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