What is the Downside of Strategic Default
Below is a great question I just received on this blog and my response.
Question:
I am up to date on my mortgage. Under the water +60K
Got divorced, things are getting more difficult to pay but still making it
Credit score is excellent
I am approved to a buy a primary residence much cheaper than what I owe now and I will rent the one I am living by doing this will save like 40% of mortgage
If I rent the one I am living and don’t pay the bank I will eventually foreclose but will have saved some $
My credit will be affected for 7 years.
Crunching the numbers it makes sense to me.
My assets will be all on retirement savings 401k and IRA
What is the downside of this? Thanks.
Response:
This is a great question, and I suspect many people are in this type of situation.
If you’re all set to purchase a similar home for less than you owe on your current home, the downside to defaulting on the home you currently have is that the bank forecloses (eventually), obtains a deficiency judgment against you, and collects on that judgment because/if you have assets. The younger you are, and the more assets you have, the greater the risk. The older you are, and the fewer assets you have, the less the risk.
For instance, if you’re 60, and your only assets are the new home you’re buying (your homestead) and your retirement accounts, then the downside here is quite minimal – the bank probably won’t ever collect on the deficiency even if it gets one.
If you’re 35 and have assets, the risk is greater. In that scenario, you’d have 30 years left in the work force, so the risk of garnishing wages is higher (since judgments are good for 20 years in Florida, and you’ll undoubtedly be earning wages for many years to come). However, even in that scenario, it’s quite possible the bank won’t pursue a deficiency, that you can settle the case without a deficiency, or that you could reduce or eliminate the deficiency through a bankrupcy.
There is no right or wrong answer in this type of scenario – it depends on each person’s situation. Hopefully, these generalities give you a good idea on how to proceed.
Mark Stopawww.stayinmyhome.com
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