Walking away from an underwater mortgage in Illinois (strategic default)
January 19, 2015 2:27 PM   Subscribe

My wife owns a house in Chicago that has been underwater since around 2008 (she owes more on the loan than she can currently sell it for). We live out of state and the house is currently occupied by tenants, but the rental income does not cover the cost of the mortgage and the utilities and it's wreaking havoc on our finances! SHOULD SHE JUST WALK AWAY??

She has waited for more than 5 years for it to regain its value so she could sell it. BUT...that still has not happened, and she just lost one of her tenants. The house has been on the market since May, 2014, and it's just not moving, even though it's priced well below what she paid for it and well within the range of neighborhood comps.

To make matters worse, even if she were to sell it now for the market value based on comps, she would need around $50,000 cash to pay off the rest of the loan at the closing, which she doesn't have.

She's been told that she does not qualify for a short sale because of the assets in her name (a car in both of our names; an apartment in NYC that is in both of our names).

She's looking at the option of just walking away from it and defaulting on the loan, but she's understandably concerned about the implications.

I understand that in Illinois, a lender can sue a homeowner for defaulting on a loan (it's a 'recourse' state, unlike CA, for example)...which brings up some questions:

1. Does anyone know if this ever actually happens?

2. If they did sue her, what would that look like and how bad would it really be, especially considering that she is a full-time resident of NY state?

3. We currently share a joint bank account and file taxes jointly. Would the money in our joint account or any assets solely in MY name be at risk because of this?

4. Any general advice on how to handle a 'strategic default' in a way that isn't super risky? Or is a strategic default simply ill-advised??

Any tips or info on this would be appreciated! Thanks!
posted by chowzdown to Work & Money (14 answers total)
 
You need to speak to an Illinois bankruptcy lawyer so that you can navigate this. There are all kinds of hidden gotchas in walking away, including the IRS coming after you for taxes on the amount you're defaulting on.

Is Illinois a recourse state? Because if so, they'll sue and they'll win. If it's currently being rented, then it's not a primary residence, it's an investment property. It's a real mess and NO ONE HERE can or will counsel you on what to do.

So, as always on AskMe when real estate is involved, Lawyer, Lawyer, Lawyer.
posted by Ruthless Bunny at 2:38 PM on January 19, 2015 [6 favorites]


Response by poster: Thanks...not seeking counsel, just facts and personal experiences...instead of 'advice' and 'tips' I should have written 'information'...

Illinois is a recourse state...and I wasn't sure how common it is for lenders to sue in a situation like this. But sounds like you're saying it IS common...

Interesting about the IRS and taxes...hadn't heard that before!
posted by chowzdown at 2:47 PM on January 19, 2015 [1 favorite]


I'm in a similar boat as your wife with a house and I'm with Ruthless Bunny on this one - talk to a lawyer. I'm currently trying to see one myself for the real estate mess I'm in. The laws vary by state and such.
posted by FireFountain at 2:47 PM on January 19, 2015 [1 favorite]


I'm the only non-underwater owner in an 18-unit condo building in Chicago that is mostly renters. In the six years I've owned, two units have been abandoned and the owners sued by their respective lenders. I know because I got CC'd on the documents as the treasurer of the association. YMMV. I don't know the outcomes. Hire a lawyer.
posted by juniperesque at 2:52 PM on January 19, 2015 [2 favorites]


You didn't say, has she already looked into the possibility of refinancing the remainder of the mortgage loan? It might cost much more over the lifetime, but maybe she could get the payments down to what the rental income will cover.
posted by ctmf at 2:53 PM on January 19, 2015 [6 favorites]


Best answer: I practiced for several years in the mortgage foreclosure courts in Cook County and thank god I don't do it anymore. This is not legal advice, which you really need right now. That said:

1. Yes--lenders sue for default in Illinois all the time, constantly. There is a special high volume foreclosure call in Cook County for this. Still. Even though the housing crisis is "over" and foreclosure rates are down. Defaulting your mortgage in Cook County will get you sued. Almost certainly by one of a handful of high volume foreclosure firms in the city who churn these cases quickly. "Strategic default" is not really a successful thing in Illinois.

2. She would have to defend the suit in Illinois, but would probably never have to appear in person, unless she did not want to pay for an attorney. She could fail to appear, also, were she to be sued, but that is unlikely to help her. Worst case, she owes the amount of default and costs, including attorney's fees. The bank would then auction the property which would be used to offset her judgment but it won't come close to covering it, in my experience.

I cannot speak to either 3 or 4.

Your best bet is to talk to a foreclosure defense attorney with experience in Cook County--try to get a loan modification to avoid foreclosure. Find a government mortgage counseling service. or look into refinancing.
posted by crush-onastick at 3:41 PM on January 19, 2015 [4 favorites]


(Sorry, I phrased that badly. Loan modifications don't avoid foreclosure actions; they avoid judgments of foreclosure, but really, it's a thing you almost certainly need an attorney for)
posted by crush-onastick at 3:52 PM on January 19, 2015


Since you want anecdotes, my friend defaulted on an upside-down car loan, sending it back to the dealership. The IRS charged her taxes on the difference that she owed. I had never heard of this before either.
posted by tamitang at 4:49 PM on January 19, 2015


Any time debt is forgiven (meaning, it's wiped out), the IRS considers it something you earned. You pay taxes on that amount.
posted by JoeZydeco at 5:40 PM on January 19, 2015 [5 favorites]


I know someone who did a short sale on a 3-flat in Chicago. The banks wouldn't even talk to her about loan modifications or enter into any type of negotiation until she just stopped paying the mortgage. Took a year, but it finally got their attention (btw, she kept all the rental income while this was going on). It was a mess, she had 2 mortgages on the place, with 2 different banks, one of them was willing to work with her, the other wanted to play hardball. The way she was finally able to get out from under the whole thing and do the short sale was to get a job transfer, with her current employer, to another state. Not sure if there were legal reasons that worked, but that seemed to stop the banks dead in their tracks from pursuing any lawsuits.

According to her, the IRS was letting the debt forgiveness thing slide, because of all the foreclosures, but that window closed last year, I believe.

She worked with a lawyer throughout the process. Beyond strategy, it was a great help to just tell the banks to 'talk to my attorney' and hang up.

Good luck.
posted by Bron at 6:38 PM on January 19, 2015


Best answer: Just FYI, once you stop paying a mortgage on a property in Cook County, the bank holding the mortgage files a foreclosure suit, THEN sometimes you can work out a loan modification. Sometimes you can work out a deed-in-lieu of foreclosure (the bank takes the deed, withdraws the suit, and writes off the loss). This is not, generally speaking, what people mean when they refer to "strategic default" or walking away because, in Cook County, failure to pay results in a foreclosure lawsuit. Foreclosure lawsuits can result in a judgment against you for the balance on the mortgage plus costs and attorney's fees (worst case), or a loan modification, or a deed-in-lieu. If there is a second mortgage or any other lien on the property, it gets much more complicated.

Unfortunately, that's how it works around here. The holder of the mortgage won't contact you to arrange a settlement until they have sued you, in my experience as an attorney practicing in mortgage law in Cook County. Exceptions always exist in the world, but I would not count on being one, especially when the mortgage holder has so far not been interested in refinancing.

In order to get a good outcome, after you stop making your mortgage payments and the foreclosure process begins, you will most likely need an attorney on your side. It's not a terribly complex or dramatic area of law, but there are a lot of rules and necessary steps to get a good outcome and the attorneys (again, in my experience as a professional acquaintance) representing the mortgage holders will not cut anyone any slack and will not help anyone out, even if, frankly, the bank is better off with a loan mod or a deed in lieu.

So, in one sense, stopping payment on the mortgage can be the first step in a rational process to force a renegotiation of the parties relationship, but I would not personally take that step without the advice of competent local legal counsel. This is just one attorney's assessment of what's likely to happen, based on what I saw practicing, of course and not actual advice,
posted by crush-onastick at 7:05 PM on January 19, 2015 [2 favorites]


Response by poster: Thanks everyone for all this information...very very helpful. We have a real estate attorney in Illinois, so we'll talk to him about all this, but it sounds like we should talk to someone who specializes in foreclosure defense...thanks all!
posted by chowzdown at 7:52 AM on January 20, 2015 [1 favorite]


Also, just to chime in, if you have an employee assistance program, you may be able to get a free phone consult with a lawyer. I did this when I had to short sale my house, and it was infinitely informative and helpful.
posted by k8oglyph at 8:22 AM on January 20, 2015 [1 favorite]


All of the answers given above are very helpful. There is also an alternative when a "short sale" will not make sense or not approved by the lender, and defaulting is not an option. Mortgage Relief Solutions. They take over upside down or underwater homes and mortgages. They take over...You move on. Just an option or alternative.
posted by Mortgage Relief Solutions at 10:56 AM on January 24, 2015 [1 favorite]


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