In foreclosure soon

[DonM]

...Its hard to do the right thing when you see so many around you doing whatever is best for themselves throwing morals and ethics out the window.

If the right thing were easy, then everyone would be doing it and we wouldn't be having this thread!

 

[Eric in McLean]

I know the property is in a LLC. Was the loan application solely in the name of the LLC? If so, did you personally guarantee the loan? The more facts you post about the loan and the ownership structure, the more likely you will receive accurate advice. Check to see if the loan is "nonrecourse." I'm guessing that it's not but you never know.

 

[Lawlar]

No Easy Answers

The majority of posts on this thread support the “moral” approach of paying one’s debts and not defaulting on an obligation. I respect that. I really do. That is the way I have lived my life (fortunately, I haven’t had a financial crises that demanded other action).

I have had clients that refused to take my advice when I counseled them to file a bankruptcy. They continued making their payments even though I could have eliminated their debts. Good for them.

Then again, I have a friend that came to me for advice ten years ago and I told him to file bankruptcy so that he could protect his home and preserve his retirement accounts. I could have eliminated all his debts and he would have been able to keep his home and his retirement accounts. He was 60 years old at the time. He just couldn’t do it. He felt it was immoral. So he refinanced his mortgage and liquidated his retirement accounts to pay his bills. Five years later he had to sell his home because he couldn’t make the payments. He spent his retirement money to stay current on his bills. He has nothing today.

Our legal system allows us to eliminate or restructure our debts every seven years (a concept found in the Bible). The reason for this is to encourage people to take risks. We have a risk economy. New businesses and new jobs are created when people take economic risks. But when a new venture fails we don’t put the entrepreneurs in debtors’ prison. Our system is built on the idea that it is better for the economy to give a new start to people who suffer a setback so that there will be new efforts to create opportunities in this Country. If people weren’t offered the opportunity to start over the economy would be held down by people who were too burdened with debts to spend or start new ventures.

Businesses take advantage of our bankruptcy laws all the time (e.g. Airlines). I’ve helped many business owners file bankruptcy (and they kept their homes and retirement accounts). Needless to say, creditors (especially individuals who cannot afford to lose the money they lent or invested in these businesses) get upset when this happens.

Interesting statistics: The average millionaire in this country has been broke 3 to 5 times during his or her lifetime. The average millionaire has had 10 or 11 businesses. They keep trying until something works.

The person most likely to have to file a bankruptcy in this country: single mothers. [By the way, the last Bankruptcy Reform Act made it more difficult for single mothers to file bankruptcy while allowing business owners to file for bankruptcy without the new tougher standards. Where is the fairness in that?]

One out of five families (20%) with mortgages are upside down. If home prices go down another 5% there will be another two million families that are upside down. This is a major problem. There are no easy solutions. But no matter what we do we should try to remember that these are real people with serious problems. If we don’t solve this problem it will take a tremendous toll on our economy.

 

[Icarus]

Lawlar,

I don't disagree with anything you said about bankruptcy. Especially the parenthetical part about the changes in the bankruptcy laws. Bankruptcy is just another financial tool, and should be used when its merited.

But, forgive me if I'm wrong, but you didn't tell the OP to file bankruptcy, and bankruptcy was never mentioned as an option for the OP. You told them, IIRC, to stop making payments on their mortgage, and the OP later said they would/could basically walk away from the mortgage. When was bankruptcy suggested as an option to the OP in this thread and why are you mentioning it now?

The issue for from the few facts that we have:

1. The OP can afford it, but made a bad investment that never generated positive cash flow. Not even from day 1 is what the OP said, even though they put 20% down. (OP doesn't think they are using OPM since they put 20% down, but that's another topic.)

2. The OP is not in danger of defaulting on their other debts and can afford this debt as well, however, it will put a crimp in their current lifestyle (which presumably would be a temporary setback because eventually real estate will recover).

3. This isn't the OPs primciple residence and OP is not in danger of being put out on the street. This is an investment property.

4. We don't know if OP signed a promissory note at the time the mortgage was issued. I don't know what the laws are in the state where the property is, or OPs home state, but for every mortgage I've gotten, I've had to sign a promissory note to get the mortgage.

Sure, if OP's liabilities are greater than OPs assets, perhaps bankruptcy is a reasonable option, but if they aren't I don't see why it's being mentioned here.

Just consider what would happen if everybody with an upside down mortgage just walked away from their investment. You think the economy is bad now? Just wait.

Like all other investments, real estate is cyclical. A lot of people seemed to have forgotten that.

-David

 

[Eric in McLean]

I think the OP is asking for legal advice, not "what is the right thing to do under the circumstances." I agree with the posters about what is the right thing to do. I'm just trying to provide a little legal analysis that has nothing to do with what is the right thing to do.

 

[Lawlar]

Walk Away

Lawlar,


But, forgive me if I'm wrong, but you didn't tell the OP to file bankruptcy, and bankruptcy was never mentioned as an option for the OP. You told them, IIRC, to stop making payments on their mortgage, and the OP later said they would/could basically walk away from the mortgage. When was bankruptcy suggested as an option to the OP in this thread and why are you mentioning it now?

The issue for from the few facts that we have:

1. The OP can afford it, but made a bad investment that never generated positive cash flow.

Just consider what would happen if everybody with an upside down mortgage just walked away from their investment. You think the economy is bad now? Just wait.


-David

I realize that the OP may not need to file bankruptcy - but they may need to do that if the bank is able to go after them after foreclosure (a rare occurance) and/or they have other debts. I'm also giving my thoughts about what others in their position should do and bankruptcy is often part of that process.

I believe anyone who is upside down in a bad investment, and who can walk way, is within their rights to do so. Why pour good money into a bad investment? I think this OP should cut their losses and preserve their capital to fund their retirement.

And I have been considering what will happen if a lot of people walk away from their homes. And it is scary. But I think that is what is going to happen - the banks are going to own a lot of homes. God help us!

 

[Carol C]

Taxpayers should not have to bail out businesses who took risks and lost...and should not bail out real estate speculators who are in over their heads. I'd be ok with a taxpayer-funded program that would allow OWNER-OCCUPANTS to buy their first homes at, say, 3% down and 3% interest, in distressed regions where foreclosures are extremely high.

We are going to have a taxpayer revolt in this country if the taxpayer-funded bailouts continue. God help us all...we're now becoming a third world country.

 

[Big Matt]

I think this is a good common sense answer. I'd also advocate longer term notes (40 or 50 years) at these lower rates.

There is one thing that people may not grasp easily, but it is much more important to have people in a house that they can afford than to have affordable housing programs with people who can't really make the payments.

I'd be ok with a taxpayer-funded program that would allow OWNER-OCCUPANTS to buy their first homes at, say, 3% down and 3% interest, in distressed regions where foreclosures are extremely high.

 

[janapur]

Everyone is coming down pretty hard on the OP and I understand that. However, the bank took just as much "risk" if not more by loaning the money. It is secured by a mortgage on the house so the bank gets the house. That was the agreed upon understanding.

I think what upsets people is the thought that why should I have to endure the effects of this market while someone else can just walk away from their promise? It is also why the government needs to be especially cautious as to how they structure the bailout. It is not fair to allow people to buy back their homes in foreclosure for a lower value (as suggested by one former candidate) while the diligent mortgage payers receive no reward for the sacrifices they've made to keep their mortgages current.

As a realtor, I am finding this market to be surreal. The majority of homes listed in our market are bank owned and we are surrounded by suburban ghost towns, with some newly constructed homes abandoned unfinished. I wonder daily where all of these homeless families are going. Will we see a cultural trend in multi-generations cohabiting much like the farmers in my lineage?

What really gets me is all of the "foreclosure sales" posted on craigslist where people are stripping down the houses before they go back to the bank. This is downright dangereous in MN where copper pipes and furnaces are a necessity. Mold issues have reached unheard of heights.

But back to the legal aspects. . . businesses do it ALL THE TIME. Not that it's right, but the option is there for a reason.

Someone said fortunes are made during recessions. There must be some people secretly doing a happy dance right now.

 

[Lawlar]

Happy Feet Turned Sad

Someone said fortunes are made during recessions. There must be some people secretly doing a happy dance right now.

I was doing that happy dance! We sold our Los Angeles Condo at the top of the market. I figured I could retire here at my wife's home in Santa Barbara. Maybe I could buy a home in Maui after the RE collapse. I was soooo smart!

And then I put my retirement money in mutual funds. And then October 2008 occurred. Guess who stopped his dancing!

God obviously has a sense of humor. Guess I may have to dust off the old resume.

 

[Icarus]

I think what upsets people is the thought that why should I have to endure the effects of this market while someone else can just walk away from their promise?

I don't think so. Some people try to do the right thing.

But back to the legal aspects. . . businesses do it ALL THE TIME. Not that it's right, but the option is there for a reason.

Businesses do what? They declare bankruptcy. This was never about bankruptcy.

-David

 

[Icarus]

God obviously has a sense of humor. Guess I may have to dust off the old resume.

Or could it be Karma?

Guess what will happen to the rest of your retirement funds if everybody just walks away from an upside down mortgage?

I wouldn't wish that on anybody, but there's a bigger picture here.

You aren't the only one who's retirement funds have diminished by a significant amount.

-David

 

[Lawlar]

Heaven

Or could it be Karma?


-David

It is probably Karma. That must be why there aren't too many lawyers in heaven.

 

[Icarus]

That must be why there aren't too many lawyers in heaven.

Well, I certainly didn't mean to imply anything like that, and I wouldn't have said that.

We both know that as a lawyer, you must put your clients interests first. I'm sure you've done that.

-David