Money Judgments and Home Equity Loans
Some housing experts say the number of shoddy home equity loans issued during the housing boom is incalculable. The housing collapse caused home prices to plummet and now homeowners who took out home equity loans are finding themselves making these loan payments on homes worth a fraction of their purchase price or refinance amount.
A recent New York Times article indicates the current delinquency rates on home equity loans is higher than all other types of consumer loans – even bank cards. The delinquency rate on home equity loans was 4.12 percent in the first quarter of 2009. In the fourth quarter, it had reached the highest in 26 years.
During the housing boom, homeowners took out home equity loans using the inflated values of their houses as security. Homeowners nationwide borrowed close to a trillion dollars from banks. A California real estate lawyer recently told the Times, “When houses were doubling in value, mom and pop making $80,000 a year were taking out $300,000 home equity loans for new cars and boats.”
Mom and pop and thousands of other borrowers are now underwater on their homes.
Some borrowers are choosing to strategically default on these loans-meaning they are purposely walking away from the debt even if they can afford to pay it at the present time.
Lenders in most cases have a right to pursue the mortgage debt debtors voluntarily walk away from. However, some say that borrowers actually have a good chance of actually walking away from the debt without being pursued by the bank. In 2009, lenders wrote off as uncollectible $30 billion in home equity loans and home equity lines of credit. Banks are expected to write off a staggering amount of home equity debt this year as well-an expected $7.88 billion in just the first quarter.
Risks of Walking Away From a Mortgage
However, walking away from a home loan is not without its risks. In many states, if a bank forecloses on a debtor’s home and subsequently sells the property, then that bank can go after the debtor for the deficient balance. California, however, is a limited anti-deficiency state. This means that banks are generally prohibited from seeking a money judgment against the debtor for any deficiency on the mortgage after a foreclosure sale in California. However, this preclusion applies only to purchase money loans, and not to home equity loans or lines of credit. Therefore a lender can go after debtors who choose to voluntarily walk away from home equity debt.
Debtors who strategically default will also face severe damage to their credit or FICO score. Both foreclosures and money judgments carry a negative impact on a debtor’s credit score for years. According to the American Bankers Association, a foreclosure can lower a debtor’s FICO score by as much as 400 points and will remain on the credit report for seven years. A money judgment will appear as a lien for ten years.
Defaulting homeowners should also consider tax implications. The Mortgage Forgiveness Debt Relief Act of 2007 has been extended through 2012 and affords protection against federal taxes following foreclosure. However, this does not apply to state taxes that a debtor may owe.
Credit Card Debt & Risky Debt Settlement Companies
Today, there are reportedly over 1.5 billion outstanding credit cards in the United States. Americans owed over $972 billion dollars in credit card debt at the start of 2009.
Americans facing mounting credit cards debts are enticed by debt settlement companies everywhere promising to settle their debts for a fraction of the current balance. To many, this offer sounds great. Unfortunately, many of these companies either charge enormous service fees putting the debtor in more debt, or are fraudulent and never follow through with reducing the debtor’s debt obligations. This leads to lenders threatening to send the defaulted debt to collections or even sue the debtor.
“Eternal” Student Loan Debt
Between 1996 and 2008, the Project on Student Debt found a ninefold increase in the number of students graduating with more than $40,000 in student loan debt. Today the number is even higher. Some say it’s because student loans seemingly follow the debtor forever. Generally, if an individual is strapped with thousands of dollars in debt, the law provides options for relief such as bankruptcy. Student loan debt, however, is not dischargeable in bankruptcy except in limited circumstances.
Contact an Experienced Attorney
Consumers concerned about underwater mortgage debt, mounting credit card debt or student loan debt, should contact an experienced bankruptcy attorney to learn about options available. Different alternatives are available for different situations and circumstances. The help of a knowledgeable attorney can turn out to be invaluable.