Strategic Default and Bankruptcy – Where is Florida Headed?

The ongoing and systematic refusal by banks to enter meaningful loan modifications with homeowners will have long-term consequences that the average American cannot yet imagine.  Just try to picture it…

Imagine your typical American family.  Married couple, two kids.  Earn $40,000 per year.  Own a house worth $150,000 but owe $250,000.  Have two cars, a small amount of savings/retirement money, and $10,000 in unsecured debt (credit cards).   The numbers can vary, but you get the picture – your typical, middle-class family that’s making ends meat but not much else. 

There’s a strong argument to be made, for such a couple, that it’s in their best interests to strategically default, i.e. stop paying on their mortgage, defend their ensuing foreclosure lawsuit, and file a bankruptcy (Chapter 7 or Chapter 13, depending on their circumstances).  Each situation is different, but in all likelihood, this would drastically reduce or eliminate their credit card debts, drastically reduce or eliminate the deficiency on their mortgage (the $100,000 difference between what they owe on their home and what it’s worth), enable them to save money while their foreclosure case is pending, and give them a “fresh start” if/when the foreclosure is finalized. 

For instance, suppose the foreclosure lawsuit were to take a year to conclude (a conservative estimate in light of recent reports out of Palm Beach that the average case takes 18 months), and their mortgage payment was $1,500 per month.  With those figures, this couple would accumulate $18,000 in savings, merely by not paying their mortgage while the foreclosure lawsuit was pending ($1,500 x 12 = $18,000).  If they completed a bankruptcy, they could keep this $18,000 if/when the foreclosure case was over.  The $250,000 debt on the house?  Poof – gone (or substantially reduced).  The $10,000 in credit card debt?  Poof – gone (or substantially reduced).  Sure, this couple would lose their house, but what was the house really worth anyway?  As I see it, and I suspect most accountants would agree, losing a house worth $150,000 when you owe $250,000 means you eliminated a $100,000 liability.  Hence, the liabilities are gone, but the $18,000 – that’s the couple’s money to keep. 

Now imagine the foreclosure case takes two years instead of one.  Again, no way to know for sure, but given what I’m seeing in Florida, it’s certainly within the realm of possibilities.  In that event, the couple would have $36,000 when the foreclosure lawsuit ends in two years.  Think about that.  $36,000 cash and little or no debt (depending on the type of bankruptcy), and all you had to do was defend your foreclosure case and file bankruptcy!  And it’s all perfectly legal! 

With this example in mind, who wouldn’t want to strategically default?  I realize there are strong moral arguments not to do this, but let’s put aside morality for a moment and view this purely from a purely financial perspective. (That’s not terribly unreasonable, since that’s what the banks typically do.)  Isn’t it clear this couple would be better off by strategically defaulting on their mortgage, defending the foreclosure lawsuit, and filing bankruptcy?  In other words, isn’t it better to eliminate most or all of your debt, save up money, and have $18,000 or $36,000 or whatever amount in your pocket, and start fresh, than to owe $100,000 more on a house than it’s worth and credit card debt?  Heck, in today’s economy, $18,000 or $36,000 (or whatever amount you were able to save) could buy you a house, free and clear.  As such, it may be possible to convert your $250,000 mortgage into a free and clear house by doing nothing except strategically defaulting on your existing mortgage, filing bankruptcy, and retaining a competent foreclosure defense attorney to defend your foreclosure lawsuit. 

Now the staggering thought – there are literally millions of Florida homeowners in this type of situation.  Sure, there are plenty of Floridians who aren’t realistic candidates for bankruptcy because they have too many assets, too much income, or both.  In today’s economy, though, such people seem to be few and far between.  As such, what percentage of Florida homeowners could strategically default, stop paying their mortgage, file bankruptcy, and be better off?  40%?  50%?  More? 

Now, try to imagine what our country’s financial system will look like if this happens.  Imagine half of all Floridians with a mortgage – or half of all Americans with a mortgage – go into default.  If that happens, what will our financial sector look like?  Will big banks even exist?  What will property values fall to?  What will our court systems look like?  These are staggering questions for which there is no clear answer. 

Now a tough question – should the typical Florida homeowner care?  In other words, to what extent should homeowners continue paying their mortgages for the “good of society,” even to their own detriment?  Undoubtedly, there are arguments to be made on both sides of this issue as well.  Given society’s “me first” attitude, though, I’m confident many people will disregard the impact on society and embark on this path.  Hence:

As things now stand, millions of homeowners will choose a strategic default.

Avoiding this consequence should be the primary objective of the U.S. government.  Quite simply, our government must step in and do something to ensure that everyone doesn’t have the incentive to strategically default.  Our economy and financial sector as a whole will not be able to function if so many Americans have the incentive to stop paying. 

How does one go about this?  The problem, in my eyes, goes back to the absence of meaningful loan modifications.  People have the incentive to default because they see that a bankruptcy court would eliminate or reduce their debt and nobody else, i.e. the banks, is willing to do so.  Using the example above, if the banks reduced the mortgage to $150,000 or even $175,000, maybe that homeowner would have some incentive to keep paying.  Suffice it to say that to fix this looming crisis the government must implement some type of loan modification program that will work on a massive, widespread level.  Absent that, our country is headed down a path of “stop paying, file bankruptcy, defend the foreclosure, and come out on the back end far better off.”

Posted in Main | 39 Comments »

39 Responses to Strategic Default and Bankruptcy – Where is Florida Headed?

  1. Eddy says:

    We live in Az and are in the process of doing just that. In our case we gave back the keys on our upside down home (paid 600k worth 325k) to the bank then sold some assets to purchase a home for cash for 95k (bank owned)-preparing to file for bankruptcy to discharge over 92k in unsecured debt (c.c. debt) and basically start all over.
    The banks will not do Loan modifications as they are better off foreclosing on the house and writing off their loss which is subsidized via the fed government. In the end the banks don’t loose and neither do we!!

  2. The banks these days have found theri interest entertaining the bankrupted customers, neretheless the unseecured debt will never get its support from the loan modifications…They certainly are sitting to make money,while we keep watching them in agape..

  3. ann stu says:

    we live in pa.,we are thinking og doing this, walk away,then chapter 7 0r 13,we will buy a mobile home in fla.,can pa. take it away fro, us in fla.

    • janet says:

      I have a manufactured home in a lovely retirement community. I pay for lot rent which is nearly the amount of the mortgage. But I don’t have to pay taxes (incl in lot rent) I am just barely making ends meet, and each month i have to use savings to get by. I am considering walking away. So if you are interested in a lovely “manufactured home”, cheap, let me know!

  4. jinks says:

    the hand that this crisis has dealt most of us in housing

  5. Chris says:


    I am a current client of yours and am wondering your opinion.

    Why are the banks so unwilling to re-write loans or remodify loans to reflect a more current market value?

    It seems it is better for them to end the legal fight of foreclosure (cut legal expenses), start receiving payments again (positive cash flow), and ultimately get more for the house then if they foreclose.

    The amount of bank owned homes will only lower the value of all homes therefore decreasing the value of their real estate holdings. Besides, the bank will ultimately sell these properties for a smaller amount than if they just rewrite loans to current market values now.
    It seems to be the best business choice for them, what am I missing here?

    • Mark Stopa Mark Stopa says:

      Banks have perverse incentives to foreclose. Often, they make more money by foreclosing because of how they get paid by the FDIC. I posted a blog about that, actually.

      Also, I think banks are unwilling to negotiate because they don’t want to give everyone the incentive to strategically default. Of course, they have to realize that is happening anyway.

  6. janet says:

    I have a manufactured home in Florida, in a retirement comm, and pay a hefty lot rent. I can barely make ends meet, and each month my savings account goes down due to overdrafts as my debt is more than income at this point. I hardly have money for food. I called my bank about loan mod, but they instead said I could file for a hardship loan. I really didnt want to do that, because I really want to walk away from it all. Lot rents in Florida do not have a cap and goes up each year. I am single and make a decent salary as a RN, but it still is not enough. What do I do? Am I in deep trouble if I walk away, and file bankruptcy? My credit card debt is about $15,000 to 18,000, not sure. I am current, but have been late a couple of times. I am 62, have good credit, but I don’t plan on buying another house in my lifetime. I just want to get from under this burden and try to enjoy life. Any suggestions???

    • Mark Stopa Mark Stopa says:

      Call us for a free consultation. We’ll be happy to discuss your situation in detail. 888-450-1549

      • janet says:

        I tried to call Friday (3-25)afternoon, because I was off from work, and left a message. No return call from you. I cannot talk at work and I work from 830am to 500pm M-F. Are you available after 500pm?

  7. kate fletcher says:

    Is it possible to strategically default on a 1st and 2nd mortgage (HELOC) in a recourse state like FL without being subject to pay back the deficiency amount?

    • Mark Stopa Mark Stopa says:

      Yes, in three ways: (1) bankruptcy; or (2) getting the bank to agree to waive the deficiency; or (3) if the bank does not pursue the deficiency.

      Feel free to inquire if you want more particulars. 888-450-1549

  8. kate fletcher says:

    Thanks! I have set up a consultation and look forward to speaking with your team about strategic default:)

  9. torn says:

    have been reading your blogs!! amazing that all i can say finially someone with honor! because the banks sure do not have it…. as many others we are upside down we are filing bk do we throw in the house or do we short sale or wait for forecloser? we are in our early fiftys have one child going off to colleage and in two years another one so dam mad at the bank our mort. was sold from chase to lbps they are useless and will never catch up my children come first then our furture if bk is the answer then 7 or 13 house or no house???

  10. Liliana Herrell says:

    Hi I really like your site.

  11. Frank says:

    My wife and I are contemplating going this route. Our house is underwater and strongly believe that it will never regain its previous inflated value. Two things are stopping us at the moment. One, we do not have any credit card debt to declare bankruptcy so we would not be able to discharge the deficiency . Two, we are afraid of having to pay taxes to the IRS on the debt forgiveness as income.

    • Mark Stopa Mark Stopa says:

      You can discharge the deficiency regardless of whether you have credit card debt (so long as you qualify for Chapter 7).

      Feel free to set up a consultation to discuss this further.

  12. Sherry says:

    I’m am contemplating this route. I was accepted into the TARP program, only to be DENIED four days later. I worked w/the mortgage company for nine months prior to this, what a waste of time. My only reluctance is a non-retirement annuity I invested in over 25 years ago, which is my primary source of income. There have been conflicting reports on whether this is exempt, & I cannot get a definitive answer. Obviously, I am a senior, and would like this off my mind~~does your seminar cover this subject, or is there some website I might be able to read? I do have some CC debt & would consider Chapter 13, if I did not have to pay thousands for a house I no longer own or even occupy (this was my primary residence)

    • Mark Stopa Mark Stopa says:

      The question about annuities is very specific – not something I encounter very often. Take a look at Florida Statute 222.14, which provides:

      Exemption of cash surrender value of life insurance policies and annuity contracts from legal process.—The cash surrender values of life insurance policies issued upon the lives of citizens or residents of the state and the proceeds of annuity contracts issued to citizens or residents of the state, upon whatever form, shall not in any case be liable to attachment, garnishment or legal process in favor of any creditor of the person whose life is so insured or of any creditor of the person who is the beneficiary of such annuity contract, unless the insurance policy or annuity contract was effected for the benefit of such creditor.

  13. Kelli Alvaro says:

    Hi Mark. I have been glued to your blogs for several weeks. I am someone in default for 26 months as I was laid off in 2009. I was lucky to find another job late last year. CitiMortgage advised me I qualify for HAMP. They have sent me two UPS packages with paperwork and want to meet with me for the second time (among other invited folks with mortages that are upside down). The first meeting I told them the HAMP 31% gross income formula was 44% of my net income and is not affordable for me. I refrained from filling out the application. I was hoping to negotiate any principal/interest arrearage forgiveness. That didn’t happen. Now my house is upside down 300%. ($333K balance and it’s worth $133,800 as of July 8, 2011) Unfortunately, HAMP doesn’t work for me at all. I’ve done everything else I can think of to stay in my home. Chase ($127K second mortgage) killed an approved short sale last year by demanding $15K to release their second lien 2 days before closing, even though they get a lion’s share of my bankruptcy payments and their debt was converted to unsecure debt in 2008 through bankruptcy. I have 11 months left of Chapter 13. Are there any options for me to stay in my home by negotiating with the bank? The suit is moving forward and it looks like I have about 5 months to come up with a solution. What can I do? Sincerely, Homeowner in North Miami

    • Mark Stopa Mark Stopa says:

      Hi, Kelly.
      In my view, you always have an option – defend the foreclosure, make it hard for the bank to foreclose, and try to get them to agree to some sort of private modification.
      I’m not sure why you say you have “about five months” left – even if a summary judgment hearing is scheduled, you have a fighting chance of defeating the motion if you hire a lawyer to defend the case.

      If you have only 11 payments left under your CH 13 plan, then that’s good. You’re close to wiping out a bunch of debt. Just make sure you fight the foreclosure in state court in the meantime.

      Good luck

  14. John Doe says:

    Mark, thanks for the great info is sorely needed. I am underwater on my primary residence bought in 2005 and at that point I already had equity against the appraisal. I then took out a HELOC and paid off debt. My wife was out of work for almost two years and we virtually wiped out our IRA and savings paying the mortgages and upkeep. She is working now but we have nothing left in savings and I am less than a year away from retirement. I think we should walk at this point and I haven’t paid the mortgages now for 6 months. I expect to be served any day now and wonder if I should even attempt to slow down the process at all? At this point in time I owe 240K on the first and 44K on the HELOC while the last house sold in the neighborhood for 15oK. Yes, this is not the route my conscience says to take but my income is going to drop dramatically in less than a year and I feel stuck.

  15. rich vallauri says:

    Thank-you…your VERY refreshing to read,to keep it brief because I’m in as deep stuff as everyone here…I’m in Gulf Breeze Florida,do you handle up here in the NW panhandle just outside Pensacola Beach?…YOU get it Mark,America didn’t do this BANKS DID…I put 20% to 25% dn on ALL my loans PLUS an extra $10 to $30k remodeling them…been trying to sell since late 2006… 8 properties…spent my savings keeping them empty to “Show”…I won’t go on and on…bottom line down to 4 left (already lost 4 to foreclousure)…Question; do you handle complaints for Fraud Upon the Plaintiff (me) Due to Fraudulent Inducement,Breach of Contract,Unfair Business Practices,Intentional Infliction of Stress and Illegal Activity…on a FAILED BANK?…on this house I’m in a Construction Perm… house was bank appraised in 06 “land only” rehab @$825,000…Now tax value down to $300,000…you know the picture on that one…anyway…can I call?
    Thanks Mark

  16. Wilmer J Andrews says:

    I have been hit with a tripple whammy, and as a result am considering walking away from my present home. July 29 I was laid off from work. August 8, I had tripple heart bypass surgery and because I am unable to work I can not collect Unemployment Insurance. I have been told that additional surgery may be needed for neck and leg stints. Add to this I am 77 years old. My income now consists of SS $1586/mo. Small pension of $847/mo and a $400/mo contribution from my wife’s small disability income. The balance on my home is $147,000 and Zillow values it at $117,000. My mortage payment including taxes is $1246.00/mo. Because of the newness of the load HUD can offer no help. The lender has been notified and I’ve provided then with income and expense documents to show I can no longer keep up this home. Other than utilities, health and life insurance I have a car loan balance of about $19000. and Credit card debt of less than $10,000. I have found a for sale by owner and owner finance property at $48,000, with $3000 down and $500 per month, which I can handle and which is in decent shape. Zillow values this at $65,000. I would place the deed in my Son’s name as this would become his in the event of my and or my wife’s death. Whether I can work again and when is up in the air at this point. Any suggestions would certainly be appreciated.

    • Mark Stopa Mark Stopa says:

      Sorry to hear about your situation, Wilmer.
      This is a great example of where one must prioritize debt.
      Anything not necessary to live currently (credit card debt already incurred, medical bills already incurred), go on the back burner.
      You can’t afford the house you’re in, but you don’t have to leave unless and until the bank WINS a foreclosure lawsuit against you.
      In other words, there is no imminent need to move.
      Defend the foreclosure, save money, and make your financial priority finding a place to live for the rest of your life that you can afford.
      If you’re able to save money for a year or two, that won’t be as daunting as it may now feel.


      • Wilmer J Andrews says:

        WOW! I never expected such a quick response. Since we’ve found a place 13K under Zillow extimated value and owner willing to finance, and out of my name, I feel this is where I am going to go with this. Even if I don’t work again, we can still afford to get this place. Do you feel that 7 or 13 is advisable? If so I will need your services.

  17. Right now I am letting the house be listed as a short sale. Due to the condition of the property, it is likely not going to be sold and it will be one of these cases where I hand over the keys to BOA. I already am renting a mobile home that I am remodeling down in Orlando.

    I am wondering how long, after the 4 month sale period, the bank will give me to move out. They have offered moving assistance and I wonder if they go trough with this or if it is a lie on their part?

    • Mark Stopa Mark Stopa says:

      Hard to say without reading paperwork.
      You’re right to be cautious, and I think it would be smart to have a lawyer help you through this process.
      It won’t cost much, and you may get screwed otherwise.


  18. donna says:

    I had already visited your office and spoke with your representative who had indicated that he was walking away from his home as well but he had a hardship (divorce).
    I have no hardship, i make almost 200 a yr, i have no credit card debt, no car pymts, etc..but i am in a house in a bad area that zillow says is worth 110,900 and I owe 226,400 on it. House is old credit score is 745 i have about 20k in cds that mature in two years,,,i dont want to loose the 20k, to a deficiency judgement , but i too think i am going to walk,,concerned about no hardship and walking away,,,and a huge credit hit, and loosing my savings to a def,,judg.,,,

    • Mark Stopa Mark Stopa says:


      Strategic default is a difficult decision for homeowners with assets, but it’s one that more and more homeowners are making.
      Feel free to call for a consultation. 888-450-1549


  19. Morde Behar says:

    Mark is there a danger in letting the bank know that the property is rented out if you are not paying the mortgage. I an trying to get a modification but the bank seems to be playing games

    • Mark Stopa Mark Stopa says:

      Yes, the danger is that the bank gets pissed off and asks the court to enforce its assignment of rents (by forcing the homeowner to turn over rents collected during the pendency of the foreclosure lawsuit).
      The good news is that except in commercial cases, this rarely happens.

  20. Fred says:

    Hello Mark,

    I lost my job in 2008 and have spent over three years trying to find a job. I tried every modification avenue there was but Bank of America always had an excuse. I have gone through all my savings and have been borrowing money just to make payments.
    My household income at time of purchase was 120k and now it is 55 k .
    My house was purchase for 417k, and i put a 10 percent downpayment.
    There is 355k left on my loan and the house is worth about 345k.
    I understand that my LTV is fairly even however I am considering a strategic default in order to recoup 4 years of wasted payments and the initial money down.
    Me and my sister (coowner) have no debt. My sister has about 25000 in the bank and i would not want her to lose that.
    All i ever wanted was a modification that we are the prime candidates for (even just reduced interest would have helped) but BOA seems to be taking no initiative in helping anyone.
    What do you advise is the best course of action?

    • Mark Stopa Mark Stopa says:


      (and this goes for everyone) … if you’re going to strategically default, never keep money in a savings account in that bank.
      It’s too easy for the bank to freeze that account and take the money.
      You might as well move the checking accounts elsewhere.

      Anyway, anyone who is upside down in the manner you’re describing has a strong argument for defaulting.
      Feel free to contact us for a consult. 888-450-1549.


  21. Sharon Schubauer says:

    I bought my condo in Pompano for 264K (2006) it is now worth 120K, I have been trying to refi under Harp 2.0 because they lifted the loan to value cap of 125%. I met all of the criteria. I hit brick walls and no one would refinance me. Qucken would not lift the 125% cap lending tree would not refi beyond 75% of loan to value. My loan was with Chase until 4-6 months ago till they sold it to Seteras a loan servicer. They would not help me because they are only refinancing homes that are currently owned by them. So I emailed my Congressman and contacted the Sun Sentinal. One day later in fact Friday May4th 2012 I got a call from quicken stating that they have stuck a deal with Seterus “today” and can now refinance me. Am I doing the right thing. I signed online Friday night, but need to print and sign the original paperwork and fax back tomorrow. I am single 57 and I know my loan will never be paid off while I am alive.

    • Mark Stopa Mark Stopa says:

      It’s hard to answer this question without knowing more about your specific situation.
      However, I will say this … I would not sign off on a loan modification where: (1) the pending foreclosure lawsuit is not dismissed; (2) there’s not clarity that the modification is being entered with the correct bank; (3) you’re not certain you can continue making the monthly payments indefinitely into the future.
      Some homeowners are so desperate for a loan modification that they will sign off even though they don’t meet these criteria. Please don’t make this mistake.

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