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Should underwater homeowner stiff lender despite ability to pay?

chicagotribune.com | November 10, 2013

By Ilyce Glink and Samuel J. Tamkin

Q: I enjoy your column and follow you on Facebook. In a recent article, you mention that the IRS Gift exclusion limit is $13,000 per person per year. Since Jan. 1, 2013, the exclusion is $14,000 per person per year.

A: You're right. Thanks for catching that mistake. We wouldn't want anyone to be confused by what can be given, tax-free, this year. It is $14,000 per person, or $28,000 per couple. Everyone who is part of the gift should be named on the check.

Q: I am to receive about $300,000 in January from my retirement plan. I could pay off my primary home mortgage of about $100,000 plus my second mortgage of about $40,000, but I am thinking about just walking away from my home. Then I could find a home that costs around $100,000 and save myself about $40,000. I know my credit would be hurt, but can my lenders sue me for doing this?

A: Depending on where you live, your lenders could certainly sue you for any money you owe them after you leave them holding the bag. Think about it: If you walk away from your loans, and your lenders were to find out about the money you receive from your retirement plan, you could expect them to come after you for the money you owe them.

You could try to sell your home now, and if the market is such that your home's value is less than what you owe the lenders, you could see if they'd agree to the short sale. If they agree, it seems that the short sale would generate enough money to pay off the first mortgage holder but not enough to pay off the equity loan. At that point, you could negotiate a settlement with the equity lender and either pay them less than what is owed or agree to repay them the balance over time.

The decision to repay your lenders has to be yours. Keep in mind that if you walk away from the home or you agree to a short sale, the deficiency (the difference between what you owe and what your home ultimately sells for) could be taxable to you if you close in 2014. However, if this home is your primary residence, and all of that debt was used to buy the home or to improve the home, and if your lenders release your debt before the end of 2013, the IRS won't require you to pay income tax on the released debt.

We don't know whether Congress will extend the law that does not require homeowners to pay tax on the released debt. You might be better off trying to sell the home and getting as much money from the sale as possible. With some real estate markets improving, you might limit some of the loss from the sale and decide to pay off the debt you owe your lenders, thus preserving your credit. If you let the home go into foreclosure, it's likely it will sell for far less and that the lenders' costs will be far greater. Assuming you think you owe $40,000 to your lender, after foreclosure expenses and a lower selling price, we wouldn't be surprised if the amount you owed would be far greater than that amount.

If you're truly intent on not paying your debts, you'd better find out what the laws of your state provide regarding residential home borrowers and their obligations to repay loans after a foreclosure. That's especially true if this happens after you liquidate your retirement account. Generally, qualified retirement accounts like IRAs and 401(k)s are protected from creditors. Once you liquidate the account, that protection may be lost.

(Ilyce Glink is the creator of an 18-part webinar and ebook series called "The Intentional Investor: How to be wildly successful in real estate," as well as the author of many books on real estate. She also hosts the "Real Estate Minute," on her YouTube.com/expertrealestatetips channel. If you have questions, you can call her radio show toll-free (800-972-8255) any Sunday, from 11a-1p EST. Contact Ilyce and Sam through her website, http://www.thinkglink.com.)



Back to November 2013 Archive

CFLA was founded by the Nation's Leading Foreclosure Defense Attorneys back in 2007 to serve the Foreclosure Defense Industry and fight pervasive Bank Fraud. Since opening our virtual doors, CFLA has rapidly expanded to become the premier online legal destination for small businesses and consumers. But as the company continues to grow, we're careful to hold true to our original vision. For us, putting the law within reach of millions of people is more than just a novel idea—it's the founding principle, just ask Andrew P. Lehman, J.D.. With convenient locations in Houston and Los Angeles, you can contact Our National Account Specialist and General Manager / Member Damion W. Emholtz at 888-758-2352 for a free Mortgage Fraud Analysis or to obtain samples of work product, including cutting edge Bloomberg Securitization Audits, Litigation Support, Quiet Title Packages, and for more information about our Nationally Accredited and U.S. Department of Education Approved "Mortgage Securitization Analyst Training Certification" Classes (3 days) 24 hours for approved CLE & MCLE Credit (Now Available Online).

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