Archive for May 3rd, 2011

Why Age Impacts Strategy in Foreclosure Cases

At Stopa Law Firm, we represent homeowners with various bankgrounds, races, ethnicities, genders, ages, and affluence.  As I consult with such clients, I often find myself coming back to the same general themes/concepts.  Yes, everyone’s situation is different, but generally speaking, there are a handful of suggestions that apply to many different homeowners facing foreclosure. 

For instance, one theme I’ve seen emerging a lot in recent weeks is homeowners in their late 50s or 60s trying to plan their financial future in the midst of a looming or pending foreclosure.  Similarly, other seniors are wondering if a strategic default makes sense for them. 

If you find yourself in this boat, here are a few important facts to keep in mind.  In other words, this is how age can affect strategy in foreclosure cases:

– Many foreclosure defense lawyers appropriately caution homeowners about the potential pitfalls of a deficiency judgment (i.e. the difference between the balance owed on a note/mortgage and the value of the home).  For many homeowners, avoiding the deficiency, i.e. not having to pay the bank any additional money after a foreclosure, is their primary objective.  After all, it’s bad enough to lose your home; it’s even worse to lose your home and then still have to keep paying. 

I’m not saying this is an unreasonable goal.  Generally, avoiding a deficiency is eminently reasonable.  My point is that the younger you are, the more important it is to avoid a deficiency judgment.  Conversely, the older you are, the less of a concern this is. 

Consider two homeowners in identical situations.  Both are married, own the home they’re living in, have two cars, retirement accounts, and a modest, middle-class income.  Both have homes worth $150,000 but owe $350,000.  However, one couple are both age 42; the other is age 62. 

For the 42 year olds, avoiding a $200,000 deficiency judgment is really important.  Those homeowners will have 20(+) years in the work force.  That’s 20(+) years where the bank could garnish wages.  That’s 20(+) years where the judgment will accrue interest.  That’s 20(+) years where the deficiency judgment will be an anchor on those homeowners’ financial future. 

For the 62 year olds, the situation is much different.  Yes, avoiding the deficiency judgment is still preferred.  However, the 62-year-old homeowners don’t have 20(+) years in the work force – they have 2-3 years.  The potential for the bank to garnish wages is small (particularly if a foreclosure case is defended and a deficiency is avoided in the short term).  Yes, their other assets could, in theory, be subject to execution to satisfy the judgment, but that’s actually the point.  These homeowners (and many like them) don’t have much in the way of assets.  Most importantly, the assets he/she does have cannot be taken!  Bear in mind:

– Retirement accounts cannot be taken to satisfy a judgment!

– IRAs cannot be taken to satisfy a judgment!

– 401(k) money cannot be taken to satisfy a judgment! 

In fact, even if you file bankruptcy, retirement accounts, 401(k) monies, and IRAs cannot be taken.  The same goes, in fact, for college fund money. 

The only way you can lose your retirement money is if you withdraw the money yourself

For the 62-year olds, preserving those retirement monies should be the top priority.  I can hardly think of a circumstance where it makes sense for homeowners like this to withdraw retirement monies to pay the mortgage, especially if they are upside-down like in my example.  62-year-olds only have so many years left to invest into retirement accounts; the last thing you’d want to do is deplete those monies to pay a mortgage on a house worth less than you owe.  If you disagree, think about it this way – where will that couple be when the retirement money is gone, they’re too old to work, and they’re still upside-down on their home?  Conversely, if that couple defaults, defends the foreclosure case, tries to get back on their feet, and preserves or increases their retirement monies, then they’ll be much better off in the long run, I’d say. 

To put it differently, the potential pitfalls of strategic default are much less for the 62-year-old homeowners.  What’s the biggest problem with strategic default?  A potential deficiency.  Well, for a couple like this, the deficiency is probably not something they’ll ever pay anyway, given their ages and limited time left in the workplace.  So they’d be eliminating an anchor from their necks while preparing for their upcoming retirement. 

In fact, when you really think about it, virtually everyone should be putting far more emphasis on their retirement accounts.  Why not?  This is money you can never lose.  Even if you get a judgment against you, even if you have to file bankruptcy – that money is yours, forever, unless you withdraw it voluntarily.  Viewed from that perspective, it’s hard to think of a scenario where, if forced to choose, it’s not better to keep funding a retirement account than pay a mortgage on a home worth less than you owe.

Mark Stopa

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