Foreclosure when to walk away By Zane Leiden Leiden & Leiden, P.C. Augusta, GA 30901

Nicks notes this article on Foreclosure when to walk away is important to Kentucky debtors dealing with Foreclosure.  Georgia has a judicial foreclosure system, which is very similar to Kentucky’s Foreclosure.  We are honored to have Zane Leiden’s post for our blog.  The firm as been doing Foreclosure and bankruptcy work for two generations. 

Foreclosure when to walk away

Foreclosure when to walk away

Given our present economy, and the uncertainty surrounding the Covid-19 epidemic, some consumers may face difficult decisions in the next year.  This article addresses one of the most difficult questions facing a distressed homeowner in Foreclosure. When is keeping your house no longer a sound economic and financial decision?  This is what you need to consider in evaluating when you should “walk away” and what potential consequences should be considered.[1]

Why let it go?

First, start with the terms of the promissory note/mortgage itself (“mortgage” for later reference).  Before struggling for a way to catch up on the past due payments and avoid Foreclosure, ask yourself if you can afford to make the regular monthly payments in the future.  Too often, homeowners will suffer a permanent decrease in income.  This makes their mortgage payment unaffordable. Unless there is a drastic reduction in expenses, they will go into default.  Even if they borrow the money to catch up payments, they will go back into default a few months later.  Many times money will be acquired from qualified retirement vehicles such as IRAs and 401(k) plans.  Not only is the house lost later on because of the inability to make the regular mortgage payments, but the homeowners’ retirement plan has tanked.

The second issue to be considered is the amount of equity -if any – in the house.  If the home is “upside-down” – meaning the mortgage indebtedness exceeds the fair market value of the house – then keeping it may not be a sound economic decision.  A home with equity offers the opportunity for a later sale with proceeds available for the homeowner.  Negative-equity means that the homeowners will be unable to sell the house.  The value obtained will be less than the amount owed.  Consequently, the lender will not agree to the sale.[2]

Getting your fair market value

The homeowner should investigate several factors to obtain a fair market value of the home: the tax assessed value; the purchase price if purchased within the previous five years; any recent appraisal obtained for a refinance or other purposes, and comparable sales.  Has the property increased in value since the purchase, or decreased?  Is the market flooded with many other properties that are for sale?  Has there already been a high amount of distressed sales in the area?  If a downward trend in value becomes apparent, it may be a good idea to let the property go.

Also, consider the fitness of the property for your current needs.  If the homeowners have any disabilities, stairs and other variations in structure height may no longer be navigable.  Caring for the exterior of the property, such as landscaping or pool maintenance, but not be physically possible or affordable.  Or the children may have moved out, and downsizing may be appropriate.  Think long-term when evaluating the decision to let it go, both from an affordability and fitness standpoint.

What are the consequences?

Relocation is probably going to be the most immediate consideration.  Do your homework and research rental properties in your preferred living area.  This is especially important for families with young children, who may not want to move them to a different school.  Find out if your lender participates in a “cash for keys” program where they will pay you to voluntarily exit the property within a specified period (usually 30-90 days) in exchange for a cash payment.

While a mortgage company has the right to obtain a deficiency claim if the house is sold for less than the mortgage balance, this is not very common in Georgia for a primary residence.  Georgia law requires that the lender obtain a confirmation of the sale in the Superior Court of the county in which the property is located.  Many lenders choose to forego approval of the purchase as it can potentially cloud the title of the property and prolong the resale.  However, a second mortgage creditor is not required to obtain a sale confirmation and may pursue the former homeowner for whatever amount of their debt that remains unpaid after Foreclosure.  Many times a Chapter 7 bankruptcy will be filed after the Foreclosure to protect consumers from the collection of a deficiency claim.

Debt Cancellation

Whether the foreclosure sale is confirmed or not, there is the possibility of the debt being voluntarily canceled (“forgiven”) by the lender.  A lender may forgive the mortgage so that it can be declared a loss on their books, with the consequent tax benefits. “Forgiving” the debt means that the lender will not hold the former homeowner responsible for the liability.  While this would appear to be the ideal outcome, it does present another peril for the consumer.  The cancellation of undisputed debt is treated as income by the Internal Revenue Service.

If the lender issues a 1099-C (“Cancellation of Debt Income”) for the amount of the foreclosure deficiency, the consumer could be responsible for paying income taxes on the forgiven debt just as if that amount had been earned.  This can result in a significant tax liability if a house is substantially upside down.  There is also a large deficiency claim after Foreclosure.  Keep in mind that there is no taxable “event” if the debt is discharged in bankruptcy.  Many bankruptcy attorneys will recommend a pre-emptive bankruptcy filing to discharge a potential deficiency claim and prevent future tax liability.

Conclusion for Foreclosure when to walk away

Facing the loss of your home can be traumatic, but remind yourself that you have to react logically and not emotionally.  Evaluate the home’s worth versus the amount of outstanding debt.  Consider your income, and any potential reductions or interruptions going forward.  Evaluate your needs in light of the house and the surrounding neighborhood.  And finally, consider the possible consequences of letting it go.  Whether you want to fight to keep your home or let it go in light of the above considerations, seeking the advice of a bankruptcy attorney would be very advisable to prevent any mistakes or surprises.

[1] For purposes of this article, only Georgia law is being considered.  The laws of other states may affect this analysis.

[2] Short sales are always a consideration if the lender will permit, but may not yield a financial benefit to the homeowner if the lender does not forgive the remaining debt.

We thank Zane for his excellent article on Foreclosure when to walk away.   Our book on Foreclosure and bankruptcy can be downloaded free

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