Given our present economy, and the uncertainty surrounding the Covid-19 epidemic, some consumers may face difficult decisions in the next year. This article addresses one of the most difficult questions facing a distressed homeowner in Foreclosure. When is keeping your house no longer a sound economic and financial decision? Learn how to evaluate when to “walk away”. Also, learn what the considerations are of potential consequences.[1]
Foreclosure When to Walk Away
By Zane Leiden Leiden & Leiden, P.C. Augusta, GA 30901
This article about Foreclosure When to Walk Aways is important to Kentucky debtors dealing with foreclosure. Georgia has a judicial foreclosure system, which is very similar to Kentucky’s Foreclosure. It is an honor to have Zane Leiden’s post for our blog. Their firm has been doing foreclosure and bankruptcy work for two generations.
Why Let it Go?
First, start with the terms of the promissory note/mortgage (“mortgage” for later reference). Before struggling for a way to catch up on the payments that are past due in an effort to avoid foreclosure, ask yourself if you can afford to make the regular monthly payments in the future.
However, unfortunately, homeowners often suffer a permanent decrease in income. This makes their mortgage payment unaffordable. Of course, unless there is a drastic reduction in expenses, they then go into default. Even if they borrow the money to catch up payments, they go back into default a few months later.
Many times money is acquired from qualified retirement vehicles such as IRAs and 401(k) plans. As a result, not only is the house lost later on because of the inability to make the regular mortgage payments, but the homeowners’ retirement plan is gone.
The second issue of consideration is the amount of equity—if any—in the house. If the home is “upside-down”, it means the mortgage indebtedness exceeds the fair market value of the house. At that point, keeping it may not be a sound economic decision.
One reason is that equity in the home offers an opportunity for a later sale with proceeds available to the homeowner. Negative-equity means that the homeowners will be unable to sell the house. Therefore, the value they receive is less than the amount they currently owe. Consequently, the lender will not agree to the sale.[2]
Getting your Fair Market Value
The homeowner should investigate several factors to obtain a fair market value of the home. Those factors include the tax assessed value, the purchase price if purchased within the previous five years, any recent appraisal obtained for a refinance or other purposes, and comparable sales. Has the property increased in value since the purchase, or decreased? Is the market flooded with many other properties that are for sale? Has there already been a high amount of distressed sales in the area? If a downward trend in value becomes apparent, it may be a good idea to let the property go.
Also, consider the fitness of the property for your current needs. If the homeowners have any disabilities, stairs and other structural variations might not be navigable. Caring for the exterior of the property, such as landscaping or pool maintenance, might not be physically possible or affordable. Another scenario is if the children move out which makes downsizing appropriate. So, think long-term when evaluating the decision to let it go, both from an affordability and fitness standpoint.
What are the Consequences?
Relocation is probably going to be the most immediate consideration. Do your homework and research rental properties in your favorite geographical area. This is especially important for families with young children, who may not want to move them to a different school. Find out if your lender participates in a “cash for keys” program where they will pay you to voluntarily exit the property within a specified period (usually 30-90 days) in exchange for a cash payment.
While a mortgage company has the right to obtain a deficiency claim if the house sells for less than the mortgage balance, this is not common in Georgia for a primary residence. Georgia law requires that the lender obtain a confirmation of the sale in the Superior Court of the county in which the property is located. Many lenders choose to forego approval of the purchase as it can potentially cloud the title of the property and prolong the resale.
However, a second mortgage creditor is not required to obtain a sale confirmation and may pursue the former homeowner for whatever amount of their debt that remains unpaid after Foreclosure. Many times a Chapter 7 bankruptcy is filed after the foreclosure to protect consumers from the collection of a deficiency claim.
Debt Cancellation
Whether the foreclosure sale is confirmed or not, there is the possibility of the debt being voluntarily canceled (“forgiven”) by the lender. A lender may forgive the mortgage so that they can declare it a loss on their books, with the consequential tax benefits. “Forgiving” the debt means that the lender will not hold the former homeowner responsible for the liability. While this would appear to be the ideal outcome, it does present another peril for the consumer. This is because the cancellation of undisputed debt is treated as income by the Internal Revenue Service.
If the lender issues a 1099-C “Cancellation of Debt Income” for the amount of the foreclosure deficiency, the consumer is responsible for paying income taxes on the forgiven debt just as if they are working to earn the amount.
Unfortunately, this often results in a significant tax liability if a house is upside down. This also might also cause a large deficiency claim after foreclosure. Keep in mind that there is no taxable “event” if the debt discharged in bankruptcy. In fact, many bankruptcy attorneys will recommend a pre-emptive bankruptcy filing to discharge a potential deficiency claim and prevent future tax liability.
Conclusion for Foreclosure When to Walk Away
Facing the loss of your home can be traumatic, but remind yourself that you have to react logically and not emotionally. Evaluate the home’s worth versus the amount of outstanding debt. Consider your income, and any potential reductions or interruptions going forward. Evaluate your needs in light of the house and the surrounding neighborhood.
Finally, consider the possible consequences of letting it go. Then, whether you want to fight to keep your home or let it go, seek the advice of a bankruptcy attorney to prevent possible mistakes or surprises.
[1] For purposes of this article, only Georgia law is being considered. The laws of other states may affect this analysis.
[2] Short sales are always a consideration if the lender will permit, but may not yield a financial benefit to the homeowner if the lender does not forgive the remaining debt.
We thank Zane for his excellent article on Foreclosure When to Walk Away.
Where to Report Foreclosure Scams
Federal Trade Commission (FTC) for foreclosure scams.
Trustee Regions and Offices for foreclosure scams that involve bankruptcy
Resources for Foreclosures
Other Related Information
Mortgage Foreclosures in Louisville Kentucky
Learn About Louisville Short Sales
If you have a foreclosure see us about your defenses. I handled many of these cases for over 30 years. In addition, I am happy to talk to you about your options. Nick C. Thompson, Attorney: 502-625-0905
