Prudent Walkaway—A Dramatic Change from Strategic Default
In the past two years many families have had to consider "strategic default" of their home. "Strategic default" means walking away from an underwater home, even though the homeowner can afford to pay the mortgage. Many homeowners considered this option as the only viable option where home values plummeted by
30-40% or more. These homeowners felt trapped in their homes, with growing families or the need to move to new locations for employment.
Other homeowners cannot afford to pay the mortgage and had no choice but to default on their mortgage. Most of the people I've encountered have been forced to default on their homes. The reasons are many:
- homes in declining areas; mortgage payments too high—homeowner was not approved for loan modification;
- homeowner close to retirement and can no longer afford mortgage payment;
- family living in two bedroom condominium, and has second or third child on the way—needs to move to larger home; or
- family needs to relocate to new location for employment and cannot sell current home.
Homeowners considering strategic default are urged to compare current mortgage payments with costs of rentals in their area. Where rentals for a family of four can be in the area of $2,000/month, homeowners can dramatically cut their housing costs—compared to current mortgage payments. Many families are paying mortgage payments of upwards of $4,000, including taxes, homeowner's association payments, high utilities, lawn maintenance and other costs. Compare that to costs of rentals--some families are opting for strategic default, especially where one wage earner has lost a job or one or both wage earners have significant reduction in income.
A Wall Street Journal article entitled, "American Dream 2: Default, Then Rent," described a couple who had defaulted, cutting their housing costs from almost $4,000/month to just over $2,000/month. They were living in a larger, maintenance free home, with "a swimming pool with three waterfalls."
The families I meet are those who are surviving tough times. These people have exhausted their retirement funds and savings. They are families surviving on one income down from two, or have overwhelming medical bills, with no options left, but to default on their home. Most of these families are adjusting to the "new normal"—including a permanent reduction in income, along with higher costs of living.
As recently reported in the Huffington Post (by Nicholas Carroll,) for these families, it is a "matter of prudently walking away from the mortgage that is dragging their family and future under the waves." In the first scenario, the family (down to one job from two) bets that they will be fully employed in the next year. They continue paying mortgage, credit card payments and car payments. If they bet wrong their cash position could plummet by $40,000 in a few months—using 401K and savings to finance their obligations.
In the second scenario, the family prudently walks away. They project that their current income—one salary--is the new normal. They immediately stop paying the mortgage and credit card payments. They cut their expenses up to $2500 a month. This family remains in their home rent free, for up to two years, while waiting for the lender to foreclose on their home. They retain their 401K savings and their cash savings. They effectively have three years to improve their employment situation.
The difference between the two scenarios is dramatic. If the family bets the primary bread-winner will be working within the year and is wrong, they could have exhausted their 401K savings, and leave their home without sufficient funds to rent a decent apartment. The family that bets the primary bread-winner will not find a job in the next year and stops paying the debts will be leaving their home with 401K and some savings intact, move to a rental--in the same school district, if need be, and will
have three years for the primary bread-winner to find a job. More than likely they will be in their home for 18-24 months without making any mortgage payments.
Consider a "prudent walkaway"—in lieu of staying in your home and using savings to make mortgage payments. Instead, rent a home and reduce living expenses before dipping into 401K or other savings. Contact your Baltimore Bankruptcy Attorney to consider your options for strategic default and prudent walkaway.
For more information about strategic default, prudent walkaway, chapter 7 bankruptcy or
chapter 13 bankruptcy contact your
Montgomery County Bankruptcy Attorney.