A friend of mine in Real Estate thinks that the foreclouser situation is a bit more complicated than it seems.

He sees it this way.... If you borrowed against your home and paid off your debts you were betting that you would someday sell your house for at least what was owed on it. This would have the effect of someone else paying off your bills since they would be buying the house from you and you would walk away clean.

Then the market tanked and your house was worth far less than you owed on it. Now you are stuck with haveing to pay off the money owed on it since it would be years before the market would recover enough to make you whole.

But what if you then walked away from the house and let it go into foreclouser? You take a hit on your credit rating, but the reality of it is that you, in effect, just discharged your debts without the cost or credit disadvantages of a formal bankrupcy.

I don't know enough about any of this to comment, but is this correct thinking or is there a flaw in this that he is not seeing?

I think that wont work...

If you owe 200k, and your house goes in to foreclosure and gets sold for 120k, I think the bank can go after you for the difference.. (80k)

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Eugene

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They can...........and they will.

It's called a deficiency judgment.

However, if you negotiate with the bank, some will accept less than what is owed on the mortgage under a "short sale". The bank gets most of its principle back and doesn't have to sit on a foreclosure for years.

I suspect that having a foreclosure is just as much of a credit hit as having a bankruptcy. I do agree that many people transferred unsecured debt into secured debt by refinancing or taking out home equity loans at lower rates.

You will also end up paying taxes on the amount of the loan that was "forgiven" in some cases.

A foreclosure will mess your credit up pretty good.

I have never seen someone do that, usualy people who are in financial trouble take all the equity out of their homes and blow it on stupid stuff. Than go bankrupt and run from the collection agency's.

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Say you had a 200k mortgage several years back. You refi and refi utill you owe 450 k. You use the 250k cash to buy another house where you move to while you rent the old place out. Then you stop making payments on the 450k. The 450k goes into forclosure and the bank takes it.

Since you are already morally bankrupt, the downside is ??

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As already explained once:

A deficiency judgment.

The downside is that the bank will sell of the house for $250K and you will still owe them the difference. If you cut a deal with the bank they might reduce the amount you owe, then you will be taxed on the amount that's forgiven.

And they will probably go after the house you have.. and anything else valuable.

Bankers aren't insanely rich bc they are stupid...

They are rich because stupid people buy things they cant afford.

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Eugene

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Which makes securing financing for real estate purchases an exercise in futility. Your personal credit report would show that such a judgment is in place, and, as that judgment would pave the way for liquidation of your current and future assets, your friendly local banker would rather whizz on an electric fence than give you a secured loan.

One way or another, you will wind up paying your bills.

I'd rather like to observe that............know anybody with a deficiency judgment who's in the market for a house??

Thanks for the input. I thought the bank might have some sort of recourse. I know that if you default on an auto loan, and the repoed car does not sell for enough to cover not only the loan and the repo costs, they will come after you since I used to buy repo cars now and then.

Not to mention the planning that would have to go into such a move even if it was feisable.

As far as being taxed on the forgiven amount...

Back in the late 70's's a friend of mine had a 3% loan on a home he had bought in the early 1960's. Loans then were going in the 11% range.

His bank contacted him and made him a deal to pay off his house for about 50% of what was owed on it. They were trying to get all the old small loans off their books.

He jumped at the deal and saved about $15,000. Then he found out the $15,000 was considered income by the IRS.

He never said how he came out with the IRS on the deal, but I imagine he had to pay since he never bragged about beating the IRS on this.

Yup, it's my understanding that any debt forgiveness is considered income for tax purposes. One of the things they don't tell you on those late night TV adds.