More thoughts on short sale, foreclosure and bankruptcy

By Stew

green-houses-cropped

Last week, I posted about our housing situation and a large number of you took the time to respond with your thoughts and advice. I enjoyed reading through the thread and many of your comments challenged my thinking.

We are good stewards for the most part

On the outset, I think it is important to state that I do not believe that the current financial pinch in which we find ourselves was the result of reckless spending or living above our means. It is true that my wife and I made some unwise decisions early in our marriage that have increased the pressure – for instance, I hope to never again take out a loan in order to purchase a car. But I think that the fact that we have stayed financially solvent for 14 months under these conditions speaks to our hard work, strategic planning, and the resourcefulness of my wife, especially as she tries to feed, clothe and otherwise care for three children on my below-average yearly salary. However, we are down to the bone right now; there are no good options left.

A debt is a moral obligation

As I read through the comments, I especially keyed in on the idea that one or more of my housing options might be wrong. Not financially wrong, but ethically wrong. Several commentators expressed the sentiment that a short sale, foreclosure or bankruptcy might have a moral component. Marsha said:

Personally, I have a moral issue with doing a short sale, default, or bankruptcy where it is not 100% necessary. I could be misguided on this point however – and it may be that the current economy will ultimately have an effect of recalibrating our financial morals.

The more I think about it, the more I agree with Marsha. I took out these loans, I signed the papers, I assumed the risk, therefore it is my obligation to do my best to repay the money that I owe. Otherwise, I become a thief.

Now, our culture (including me) have been softened to the idea of defaulting on financial obligations. Our country does not throw debtors into prison. I sometimes watch poker on television and if you dig a little, you will find that most professional poker players have declared bankruptcy – it is simply a part of their profession. In our country, there is a sense in which it is too easy to simply default on loans.

There is certainly a price to pay for defaulting in the form of a poor credit score and the inability to get credit, but that is a small comfort to the institutions that loaned the money in the first place. Every year, our government seems to make life easier and easier for those who are poor stewards of their finances – while individuals who practice frugality, industry, good planning and financial restraint are squeezed harder and harder because they are seen as being “lucky in life’s lottery”.

But just because our culture might not value one’s word, does not make it right for me to take the easy way out of my quandary. I am going to let biblical ethics guide my decision about my house. That does not mean that I might not still be forced to foreclose or declare bankruptcy, however I am going to resolve to fight harder, to be more creative and to do everything within my power to repay the money that I owe.

So here is my next step:

A short sale means that at least one of our creditors simply does not get paid, I hope to avoid that possibility, even if it costs me more money. Foreclosure and bankruptcy are also similarly problematic and even if we have to foreclose, I hope to still repay what I owe.

Therefore, my next step is to call my home equity loan company and request that they adjust my HELOC so that it is a personal loan without my house as collateral and ask them to lift the lien on the house – could be tricky. If that happens, I plan to call my first mortgage and ask them to accept the house itself as payment – otherwise know as deed in lieu. If my first mortgage refuses to accept the house as payment, we will attempt to find a renter – a strategy that will probably cost us more money in the long run but, a renter will buy us a little more time for the market to change or our financial situation to improve.

I will let you know how it goes.

Picture by woodleywonderworks.


19 Responses (including trackbacks) to “More thoughts on short sale, foreclosure and bankruptcy”

  1. The Weakonomist Says:

    Morals? Ethics? Responsibility? We have not room for such things in America!.

    Just kidding of course. I admire your sense of duty and ownership of your loans, it’s rare. And even if I was one of the people that said your behavior got you to where you are, please ignore these people. Focus on getting out of a jam then look back and figure out if you actually did anything wrong.

    Oh and I learned something about bankruptcy this week. It was originally intended only for businesses in the US. However today personal bankruptcies are something like 97% of all bankruptcies.

  2. Christina Says:

    I hope things turn out well for you. How does the deed in lieu work? We are almost at the end of our rope with our vacant house that won’t sell, and we are researching all of our options.

  3. Wealth Pilgrim Says:

    I admire your honesty and willingness.

    I would just add that it’s important to acknowledge difficult times while remembering you are not alone. You’ll get through this.

  4. TERRIE Says:

    HAVE YOU THOUGHT OF RENT WITH OPTION TO BUY?….WE ARE IN THE SAME BOAT..ARE THINKING ABOUT THIS[TALK WITH YOUR REALTOR IF INTERESTED]

  5. Stew Says:

    Weakonomist – I think that the beauty of the American system is that historically, such values were honored and rewarded. Some of my hesitation here stems from the very real possibility that our government might reward those who default to a greater degree than those who stick it out.

    Christina – the way I understand it, you simply tell the mortgage company that you are giving them the house and hope that they do not foreclose on you. Most companies do not like this.

    Wealth Pilgrim – it is easier to write about doing this than to actually see it through . . . hope I can stick to my guns.

    Terrie – we have investigated that option quite a bit, but found no takers. I would love to take that option.

  6. MLR Says:

    @ Weakonomics “Morals? Ethics? Responsibility? We have not room for such things in America!.”

    I agree, both people and corporations have really gone over board with pushing responsibility aside.

    @ whomever

    In re: to the debt being a moral obligation, I have a hard time seeing it this way. Both the loan company and you signed a mortgage. This mortgage goes over how much and how often you need to pay. It also goes over the repercussions if you do not pay.

    I don’t understand why people don’t take the opposing view of “Well, that’s the risk the bank took!” But it’s easier to say only people need to be responsible to their commitments, not corporations.

    I understand the implications of people filing bankruptcy, too. But hey, isn’t the mantra “Let the free market work!” right now? If so, people exercising their contractual right to stop paying and give the house back is in the spirit of a free market. As much as it pains me to say that because I know it will make things worse. But maybe that’s what we need to remind corporations that they are the second half of the contract.

  7. collin Says:

    First, of all Stew I absolutely know what it is to be in the position you find yourself in, I went through this almost 25 years ago.
    Second, the difference in being able to make it and not, is usually only 2-300 dollars/mo.
    Third, rent the house as soon as possible for anything you can get in the market where it’s at.
    Fourth, you will have some negative cash flow, but not as much as before.
    Fifth, talk to a tax guy, I believe you can take interest paid and taxes paid on that rental property as deductions much as you would on your primary residence.
    Sixth, adjust your withholding to reflect the loss from taxes and interest, this should boost your take home pay and allow you to weather the storm.
    Seventh, real estate markets come back, and what looks like a loss now may well break even or turn a profit in 1-3 years.
    Finally mortgage holders often accept deed in lieu of foreclosure,
    which is supposed to be neutral or minimal impact on your credit score, but then the will list it on the report to the credit bureau
    as a foreclosure, so if this is the option you choose monitor your credit reports closely and make any necessary corrections asap.
    Hopes this gives you some food for thought, and may God bless you
    in your struggle.
    Collin

  8. MyJourney Says:

    Stew,

    Have you found out whether you signed a recourse or non-recourse mortgage/HELOC? I’d be happy to research the issue for you if I knew what state you are in.

    Short sale might be worthless if you have a recourse mortgage, i.e. they can come after you for the difference.

  9. Marsha Says:

    The fact that a mortgage is a legal, contractual obligation does not prevent it from also creating moral or ethical responsibilities – for both (all?) parties.

    In making my original comment, I did not mean to imply that short sales or bankruptcies, etc. are morally wrong categorically. Clearly, some people truly do become the victims of circumstances. I only meant to suggest that, at least for me, I need to consider moral implications as well as the financial bottom line.

    GLBL, thanks for sharing your reflections, and of course I wish you all the best!

  10. South Texas Says:

    Have you considered a property management company? My neighbor uses one and they always have renters.

  11. Kristen Says:

    It might be worthwhile for you to meet with a housing counselor. If you visit the web site for the U.S. Department of Housing and Urban Development (www.hud.gov) you can find a certified housing counselor in your area.

    There is no cost for what is termed as a “foreclosure prevention counseling session.” The counselor could sit down with you, look at your financial picture and what you have going on with the mortgage and make some recommendations to help you decide how to proceed. The counselor would also have a better idea about how each of the options might affect your credit score. The counselors also have the ability to intercede directly with your lender to come up with a workout plan to help you avoid a foreclosure if that’s where you might be heading.

  12. Cascia @ Healthy Moms Says:

    I wish you the best of luck with your home. My husband and I tried to sell our house about a year ago by doing a short sale. Unfortunately id didn’t work because their just were not enough buyers around at the time and the few buyers that actually looked at our home either had issues with the house or the price. To make a long story short we ended up foreclosing. The day I packed all of my stuff to leave was the hardest thing that I’ve ever done. We made so many memories in that home and it was a great place to raise a family. I hope you don’t ever have to go through what we did.

  13. Abigail Says:

    I just wanted to say thank you. Thank you for being open to other people’s ideas. Thank you for owning up to some of your mistakes — and for actually realizing that you have an obligation to your creditors.

    It terrifies me how easily our society walks away from debt. In desperate situations, I guess I kind of understand short sales. But I don’t understand, I guess, why people don’t sell the homes, pay a huge chunk of the mortgage off, and then refinance to some low, monthly payment. There may well be practical concerns that impede this idea, but it’s worrisome that no one ever seems to even consider it.

    So I just wanted to say that you’re doing a good thing by realizing the commitments you made, and by realizing that you need to try to honor them to the best of your ability.

  14. ABCs of Investing Says:

    Stew, with all due respect I think you are crazy!

    Mortgage companies make their money by estimating default rates and charging their fees around those data. Their business is based on trying to maximize profit by lending as much as possible but keeping the defaults to a level where they can make a good profit.

    If a mortgage company gets greedy and lends to everyone then that strategy might do well (in good times) or very poorly (in bad times). A mortgage company that doesn’t take any risks won’t make much money because they won’t make very many loans – although their default rate will be quite low.

    My point is that you are not “screwing” the mortgage company if they don’t get the full loan value back – of course they would prefer the full amount but that is just the way their business is – not every mortgage is going to be paid 100%.

    If you make you and your family suffer to try to live up to a business contract then you are only hurting yourself – which I don’t think is very ethical.

  15. Fernando Herboso Says:

    When the banks act with the same moral standards as you are. . I will advise my clients to do just that. .for now?. .my take as a Realtor experienced with Short Sales with a current inventory of 30 listings. .
    We will never see our home values again as high as 2005.. during our lifetimes. . .we have 3 times the amount of foreclosed homes waiting for their turn. . we have in same places in the US 1 out of 14 homes with a foreclosure notice!!
    The banks have acted irresponsible and I feel at this point that if you qualify for a short sale.. you should take it and run!

  16. Stew Says:

    Guys, I understand you a little better now – if you look at today’s post, you see that my attempt to find a way to repay the money that I owed was not received well by my bank. They would rather that I default or foreclose because then their insurance kicks in!

Leave a Reply

css.php