Is Your Home Undewater? Is Debt Relief Moral?

When you think of Arizona being in a desert, you usually don’t worry about a home being “underwater”. However, if you happen to be among the thousands of Arizona homeowners that purchased a house between 2001 and 2006 your home may very well be underwater! These days “underwater” means that the remaining balance on your home loans exceeds the home’s present market value. Being underwater has severe adverse financial consequences, including a loss of equity, impaired borrowing ability, and the inability to sell your home unless you pay off the shortage out of your pocket or are able to get the Lender to agree to accept less than the amount owed in full satisfaction of the lien amount (“a short sale”).

Our office consults with clients everyday that are drowning from being underwater and want to know what their options are. Whether you hope to modify your mortgage, short sell your home, or to surrender your home to a Trustee’s Sale (foreclosure) or in a Bankruptcy proceeding, one result that they all share is that your credit rating will suffer as a result. One of the biggest challenges that we face when counseling clients concerning debt relief options is convincing them to let the credit rating go!

Last year a client came in for a consultation and was sick with worry. He had not paid his mortgage in over nine months, he was being sued by two of his credit card companies for nonpayment and his car had been recently repossessed. After reviewing his assets and liabilities, it was clear a Chapter 7 Bankruptcy Petition was in order. When this alternative was suggested his response was that he didn’t want to ruin his credit! He obviously had not been checking his score recently. A common statement that many frustrated clients make is that the Banks got their bailout and where is our bailout? Well there is a bailout for everyone else, but you must have the “magic ticket” to obtain your bailout. And what is the “magic ticket”? A BAD CREDIT RATING!!! And the best thing about a bad credit rating, it is fairly easy to obtain; just stop beating your head against the wall, robbing Peter to pay Paul as the old saying goes, and do not pay bills that you cannot afford, or will not be able to afford to pay.

In the words of former disgraced President Richard M. Nixon, “Let me make one thing perfectly clear!” HAVING A BAD CREDIT SCORE DOES NOT MEAN YOU ARE A BAD PERSON. And in a Recession such as the one we have been living through, avoidance of debt via legal alternatives such as debt reduction and Bankruptcy is not immoral or a bad act! Our economic system anticipates that debt obligations may need to be adjusted, reduced or even written off from time to time. That is why credit card companies charge 20% interest when the prime lending rate is 1%, and when you are required to buy PMI Insurance when you purchase a home with only a small down payment. The expectation that a Borrower may not be able to pay back a loan is built into the system. So DO NOT USE YOUR RETIREMENT FUNDS OR CHILDREN’S COLLEGE ACCOUNTS to make payments on your credit cards. DO NOT TAKE YOUR WEDDING RING TO THE PAWN BROKERS in Vegas to temporarily preserve your 800 FICO Credit Rating.

For those of you that have not been negatively impacted by this Recession and still have assets. DO NOT BE OVERLY CRITICAL of those that have experienced hard times and are no negotiating to reduce their bills or are forced to file Bankruptcy. Bankruptcy is the longstanding Federal Bailout program that was established by our Founding Fathers, more than half of whom ended up broke or in Debtor’s Prison after the Revolution. Out of the hundreds of people that we have helped settle their debts for less than the full amount, I know of not one person that borrowed with the intention of not paying the full amount back. The system was skewed in such a fashion that most borrowers truly believed that the lenders providing the loans had reviewed the application and determined that they would be able to pay back the loan. After all, what bank would provide someone with a loan or credit if it should have been obvious that the person would be unable to meet payment obligations in the future? The answer, which became painfully obvious, was a lender that selling the loan to a schmuck that would buy any piece of junk for face value, i.e., the Federal Government via Fannie Mae and Ginnie Mae loan guarantees. Consequently, do not feel sorry for these “venerable institutions” that have raped and pillaged the average American worker and left their Great Grandchildren having to pick up the future tab.

Brent T. White, a University of Arizona Law Professor drew national attention when he published a paper about Underwater Mortgages and the fact that millions more Americans were not “walking away” from property investments even when there was little chance that the investment would “recover” during their lifetime. He contrasted the lending community’s insistence that Borrowers have a moral obligation to pay their underwater loans while at the same time these lenders refuse to provide any assistance to their “most moral” customers, those with perfect credit. In his new book, Underwater Home: What You Should Do if You Owe More on Your Home than It’s Worth, points out the dilemma of the Borrower that needs help but still struggles to maintain a high credit score:

Simply put: Your lender isn’t likely to work with you if you’re current on your mortgage. Your lender has no reason to modify your loan or agree to a short-sale if you are making payments on time. Your lender also knows that the best predictor that you’ll continue making payments is a past history of making payments. To your lender, your excellent payment history isn’t evidence that you deserve help. It’s evidence that you’ll go right on paying your mortgage no matter what your bank does.

Moreover, your lender knows that borrowers with good credit scores are unlikely to default even when they’re deeply underwater. If you have a good credit score and a solid payment history, your lender isn’t likely to be interested in talking with you. You’re in a tight spot and your lender knows it. Unfortunately, there’s probably only one way out: intentionally defaulting on your mortgage.

Having spent the past two plus years working with hundreds of Borrowers under financial stress, we agree 100% with Professor White’s analysis. Whether you are insolvent and faced with mounting debt in the near future, or just want to get rid of a property investment that went bad via a “strategic default”, the first step is to stop throwing good money after bad. Ultimately, odds are either the lender will come to terms you can afford, or you will be able to get rid of the “black hole” property and get on with your life!   Either way, you need to be able to let the good credit go, and thus force the lender to deal with you in a fair manner. But please, consult an attorney and an accountant for valuable advice on how best to negotiate. Most of our clients end up paying a few thousand dollars in costs and fees and can save many thousands, if not hundreds of thousands in debt relief.

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