Updates to Walk Away From Debt for a Better Future
These are updates to the current version v.1.25, released November 4, 2011. (Updates to v.1.20 and v.1.15 are below).
2/14/2012: Property tax lien question from a reader: Should taxes continue to be paid if you are still living in the house but not paying the mortgage?
In most counties I've lived in -- which makes for a pretty small sample, maybe 10 – property tax departments typically didn't take any action at all until the homeowner was in arrears for going on a year. I used to marvel reading the delinquency notices in the Washington Post; it seemed as though half of Congress was overdue on their taxes. Now as in the '90s, I wasn't sure what they could really do about it: foreclose on you?! Out of curiosity I called a D.A. friend and asked if his office ever prosecuted over property tax, and he said "Nope. It's not a criminal matter, it's civil." Bottom line: if you've stopped paying the mortgage, keep the tax money in your pocket.
2/10/2012: Fearmongering: "Now that all 50 states have settled their lawsuit with big banks over unfair lending practices, the foreclosures will speed up fast."
Maybe. But the media seems to have gotten the idea that the big mortgage banks have gotten a free pass, and no further litigation or prosecution is possible. The facts:
- The banks didn't get a 100% reprieve; other civil and criminal prosecution is still possible.
- Freddie Mac and Fannie May weren't part of the settlement, and combined they hold the largest pool of residential mortgages on the way.
- The banks may not have the resources to speed up foreclosures. After all, one of the key points in the 50-state lawsuit against them was "robo-signing." How are the banks going to speed up foreclosure processing – improved robo-signing?
2/7/2012: Banks Now Paying Homeowners Serious Money to Move Out Without Fighting Foreclosure
From Bloomberg business news, 2/7/2012:
"Banks, accelerating efforts to move troubled mortgages off their books, are offering as much as $35,000 or more in cash to delinquent homeowners to sell their properties for less than they owe.
"Lenders have routinely delayed or blocked such transactions, known as short sales, in which they accept less from a buyer than the seller's outstanding loan. Now banks have decided the deals are faster and less costly than foreclosures, which have slowed in response to regulatory probes of abusive practices. Banks are nudging potential sellers by pre-approving deals, streamlining the closing process, forgoing their right to pursue unpaid debt and in some cases providing large cash incentives..."
As noted in the news story, it's not all banks, and not all the time, but it looks like a trend. This is potentially huge to the strapped homeowner with an underwater home, because traditionally the "cash for keys" deal to get a homeowner to move out without putting up a fight was 3 months of mortgage payments, or about $5,000-10,000. That's about enough money to buy new tires, rent an apartment, and be panicking again in three months. $30,000-35,000, on the other hand, if you budget carefully, is enough to move to where the jobs are, or retrain yourself for a new career.
1/19/2012: What Happens If I Stop Paying My Credit Cards?
I've been having this conversation with people for about 20 years. With a couple of books on how to handle personal finances in the Great Recession now published, I have the conversation a lot more often. Not often enough to promise this will be your story ... but the conversation sure doesn't surprise me anymore:
"So I just quit paying all my credit cards at once, four cards with $35,000 racked up on them, and do you know what happened?!"
"Nothing?"
"Yes!"
As I wrote, I can't promise this will be your story. But it's more common than not. About the only people who seem to be getting targeted for lawsuits are the poor ($200-$2000 credit card bills) and the yuppies who ran up $100,000 on a single card and stopped paying. There's a chart further down this page on the likelyhood of a lawsuit over different sizes of credit card debts.
1/12/2012: Crazy Behavior From Smaller Credit Card Companies?
Information in the current version of the book (v.1.25) about the major banks still seems to be true – they'll be unhelpful, deceptive, and possibly nasty if you call them with a hard-luck story ... but they'll usually start to wheel and deal and make offers if you miss a payment or two.
However I had a report yesterday from a man who'd tried this tactic with Capital One credit card company. Far from the modern big bank style "we care!" letters, this was his description of the behavior of some Capitol One collectors.
"Seeking a settlement with Capitol One, I missed one payment. Within a week they were calling me, and after Christmas I found 20 or so messages, all read by the same person from a script. I did not return the calls. Then they started calling from another number (I do not answer unknown callers ever) and are now doing so every hour, all day long, for more than a week so far.
"I emailed Cap One. I told them I was under sever financial stress and seeking a loan to settle my debts, barring which, I would be forced to file for bankruptcy. I also said I was to frightened and nervous to deal with them on the phone and to please stop the calls. Then I would be happy to do so by email or postal service. They responded by email saying they need my phone number in order to stop the calls. Huh?
"What happened to the polite letter I was to get in the mail after two months? What's going on here?"
It turned out that Capital One still had his account in-house, and had no plans to sell it off for six months, but they'd outsourced some of their collections calls to a debt collector – in this case one of the nuttier collections agencies.
Bottom line: my observation about major banks sending rational letters after a missed payment or two still rings true. But smaller credit card companies may be outsourcing collections, and have commission-starved collectors running wild. This leaves this man – who is trying to negotiate a short payoff – wondering who's in control, Capital One or the collections agency?
Answer: we don't know yet. Maybe he'll be able to get through to someone in Capital One (because the collections agency is foaming at the mouth for the full amount), or maybe in a few months it'll just end up with the collection agency.
1/7/2012: Debt and Divorce
This isn't really an "update." It belonged in the book from day one, but the Great Recession issues diverted me from including what I've known for a long time: divorce alone can lead to financial catastrophe, and if one or both spouses are in debt, it's that much more likely.
Common-sense divorce rules that haven't changed a bit with the recession:
1. The spouse that acts responsible will take the heat from the debt collectors. Your husband or wife skipped town and left you holding the bag on a bunch of joint accounts, like credit cards and tax bills? So you call all the creditors and explain that your spouse skipped, but you're a good person?
Wrong! You've just saved the collectors the expense of "skip tracing" your spouse. They will now forget all about your spouse, and focus on getting you to pay 100% of the bills.
Moral: don't be responsible. Just say you're house-sitting and give the collectors whatever information you have about your ex's location.
2. It remains true that the divorce lawyers are the main threat to any cash you have left. Most lawyers don't want to work through the divorce as quickly and cheaply as possible. They want to represent you – and fight over your assets, until they've all been spent on lawyer's bills.
I never had any solution to this, other than shopping hard for a rational divorce lawyer. Now there may be an alternative: the Nolo Press website seems to be succeeding in listing honest lawyers. (I never thought they'd pull it off, but in looking through their lawyers' listings I'm seeing a lot of lawyers that I would probably hire – and I've fired a lot more lawyers than I've hired.) I don't have any financial relationship to Nolo Press. Lawyers listings: www.nolo.com/lawyers. Here is an example of a divorce lawyer who is talking sense: www.nolo.com/lawyers/attorney/rachel-fishman-green-esq-5099.html (I don't know her and am not endorsing her, but she's talking good sense, an example of what you want to be hearing from a "minimum pain" divorce lawyer.)
The updates below, to v1.20 of the book, have all been incorporated in v1.25. If you are a purchaser of the book, please see bottom of page for information on getting an update to the latest version of the ebook. If you are only one update behind, it's probably not worth your while to get an update – it will be simpler to just read the notes on this page.
10/26/2011: HARP loans still a sham for underwater properties
Despite recent government HARP loan hype, the program still does not offer mortgage principal reductions – just modifications to monthly payments. So if your home is above water, HARP may have something to offer. If it's underwater, a HARP modification just keeps you strung out paying off an over-valued home.
10/15/2011: Be cautious about borrowing from friends or family to pay off credit card debt
If your job is stable, and your only financial problem is a few thousand in credit card debt, at 29.9% interest, then borrowing to pay off the loan can make sense. If you have a lot of credit card debt, the chances are that it's a bad idea. It sounds good ... but what actually happens when you borrow from family or friends to pay a CC company, is that you've just converted an unsecured debt into a secured debt. Secured by what? By your personal obligation to family or the friend. The bank debt you could have walked away from ... but if you're like most people, you can't honorably stiff a friend.
10/7/2011: Some Banks Now Doing Mortgage Principal Reductions, Primarily on Option ARMs
In "Pay the Mortgage or Default? It's Becoming a Game of Musical Chairs" on 10/6/2011 I described how Chase and Bank of America are occasionally making principal reductions on mortgages (the only deal that really makes sense to an owner sitting on an underwater home).
This is a more extensive list, though I don't have hard numbers on what percentage of these mortgages are still held in-house.
- Bank of America's portfolio that came with the purchase of Countrywide Mortgage.
- Chase's package of mortgages that came along with its acquisition of Washington Mutual (WAMU).
- One West Bank, which acquired paper when it got/bought IndyMac Bank in Southern California from the FDIC.
- US Bank, which acquired paper when it got/bought Downey Savings in Southern California from the FDIC.
- Wells Fargo's portfolio of in-house mortgages acquired with the purchase of Wachovia bank, which I believe Wachovia acquired with the purchase of World Savings.
9/17/2011: State Courts Cracking Down on "Rocket Docket" Lawsuits Over Credit Card Bills
Article from the Washington Post on how the Maryland Court of Appeals has set new requirements for debt collectors, requiring more than a name, address, and amount of debt to file a lawsuit. The article makes mention of eight other states doing the same. It's about time. Note, though, that this could take a few years to roll through all 50 states. (And of course debt collectors then may simply set up software to produce phony supporting documentation.)
9/10/2011: Lawsuits Can Be a Bigger Problem Than a Bad Credit Rating ... But Let's Not Get Excited Just Yet
In Walk Away From Debt for a Better Future I've made it clear that "I recommend taking lawsuits more seriously than your credit rating. It's very easy to restore a credit rating compared to dealing with legal judgments."
Emails from readers have shown that I had better put this in perspective: I consider the consequences of a lawsuit more serious than damage to your credit rating.
But the likelihood of a lawsuit vs. damage to your credit rating is very different. Where credit rating damage is almost automatic, in this age of networked computing, the odds of a lawsuit in any given situation are slim. Lawsuits are, at present, far and few between. This may change – we live in fast-changing times – but at present here's a rough chart listing the probability of a lawsuit being filed against you in varying situations.
Credit Card Debt to a Single Bank
| $100-5,000 |
Oddly, in some counties or states, this may be the highest risk of a lawsuit, if there is a sleazy collection agency targeting poor people. (See the 4/20/2011 update below.) In most areas, though, the odds of a lawsuit are less than 1%. |
| $5,000-25,000 |
Since 1990 lawsuits over CC debts under $25k have been almost unheard of – the cost of litigating them generally wipes out any profit for the creditor, and the size of the debt suggests that, unlike the poor, a debtor might indeed turn up in court with a lawyer. |
| $25,000 + |
Don't know. Very few people I connect with have these kinds of balances with a single bank or on a single credit card. Up at around $50k+ in CC debt to a single bank, these are generally Neiman-Marcus and Hawaiian vacation debts, and these people usually contact "their attorney." My impression is that they knock the CC company down to the current 20-cents-on-the-dollar rate (which is a payoff many of my readers cannot afford). |
Why are collectors such wimps on the big sums? First off, it's rarely the originating lender (the bank) who launches a lawsuit. And the debt collectors bought them at 3 cents on the dollar, so while they'd love to have some "chump" pay them the entire amount, and make a 97% profit margin, 20 cents on the dollar is still a mighty good profit to them, if they can get it by harassment, threats, and negotiation.
Lastly, debt collectors aren't really set up to play hardball litigation against competent litigators – they'd have to revise their entire system, because a good litigator is going to be dragging them through the mud, with depositions and interrogatories and demands for documentation they never even received from the original creditor.
Mortgage Deficiency Lawsuits
| $1-25,000 |
Like CC debts under $25k, lawsuits over mortgage deficiency judgments are rare, since the cost of litigating them generally wipes out any profit for the creditor. Pre-Great Recession, they were non-existent, since people in foreclosure were almost certainly flat broke, and couldn't pay a judgment anyway.
Since the recession, the situation is more uncertain for the bank. The homeowner might be broke – or might have walked away while they still have enough money to defend a lawsuit – and be mad as hell at the bank, and willing to "go to the mat." Going to the mat is expensive, and a bank can run up $25k in legal expenses mighty fast. |
| $25,000-$100,000 |
I expected to see these hitting by now – but they're not. Real estate law professors who follow the statistics are as puzzled as I am. If they do start up – that's if – my guess is that it will be the lenders of second mortgages and HELOCs. If so, the decision will probably be emotional – the holders of second mortgages and HELOCs will be angry that they signed away their right to initiate the foreclosure through subordination, making them the junior lien holder. |
| $100,000-500,000 |
Again I expected these to be filed by now, and again they haven't been in any big way. However it's a lot of money, and you should be developing an assets protection plan just in case. |
| $1,000,000+ |
I would figure a lawsuit is on the way – but if you are playing in that league, you can probably afford not only a good legal defense, but a tax lawyer who can show you how to protect your assets in case you lose the lawsuit. |
Lawsuits Over Medical Bills
Despite mainstream news articles on how doctors and hospitals are "getting tough" with debtors, I'm not seeing any increase in lawsuits. Some doctors' office seem more ready to turn accounts over to collections agencies, others now seem increasingly willing to take monthly payments. (Hospitals are half billing department anyway, so they just turn them over to debt collectors as always.)
In any case, I'm not getting reports of increases in lawsuits filed, and in the case of medicine, it may never happen – because suing over unpaid cancer treatment bills – god forbid cancer treatment for a child – is the kind of thing that gets the doctor or hospital on the front page of the local newspaper.
Lawsuits Over Furniture and Appliances
I don't have enough data to even have an opinion. My guess is that if enough accounts pile up with the same debt collector, and they seem like easy targets, meaning poor people, the debt collector might bundle a few hundred and ram them through the court in a morning, as I describe them doing over small credit card accounts above.
Lawsuits By HOAs (Homeowner's Associations
See 8/22/2011 post below
Lawsuits By Rogue Lawyers
The wild card has always been lawsuits by shyster lawyers who buy up collections accounts for their own firm – and they are quite likely to sue, since it's their main business, and their cost of litigation is just part of their business overhead. The giveaway is that the threatening letter comes on a lawyer's letterhead, out of the blue, with no warning from the original creditor or any subsequent collection agency. This means the former creditor has quite likely sold the debt outright to the lawyer.
However, under the Model Code of Ethics of most state bar associations, lawyers personally trafficking in accounts receivable is a no-no, a fairly big one. While I regard bar associations in general as "lawyer self-protection guilds," they do sometimes take action when a lawyer is making them all look bad, and personally going into the debt collection business tends to anger other lawyers. So if you think the lawyer might be acting as his/her own debt collection agency, it's worth giving the state bar a call to find out if they care. They might blow you off, but they might drag the shyster in for a pummeling, which could substantial cool that lawyer's jets.
Bottom Line
Lawsuits don't happen all that often, but then cars don't run stop signs all that often either. So you treat the possibilities the same way: with caution, but not panic. If you owe money, just look both ways, move your liquid assets (checking and savings accounts) to new bank accounts and cash, and check the rearview mirror now and then. And if looks like a lawsuit is on the way, reopen Walk Away From Debt and dive into the sections on "Asset Protection" and "Dealing With Legal Judgments."
8/22/2011: HOAs (Homeowners Associations) filing lawsuits for delinquent dues against owners who walk away.
This was trumpeted by a law firm's news release, but in this case I feel no need to research whether there's a trend. I believe it. This is because a book I wrote in 2003 called Fighting Slander has gotten me continual email about HOAs, convincing me that the two HOAs I've had in my life were pretty typical: the most slandering, squabbling bunch of people outside of maybe a school board.
When you consider that HOAs are often hardup for cash as foreclosures keep rolling – plus they frequently have one or more residents who are lawyers on the board (hence a low cost of litigation) – there is little doubt in my mind that an HOA is a whole lot more likely to sue than a credit card company or a doctor's office.
Bottom line: you'll probably want to keep paying your HOA dues even if you have stopped paying your mortgage.
The updates below, to v1.15 of the book, have all been incorporated in v1.20. If you are a purchaser of the book, please see bottom of page for information on getting an update to the latest version of the ebook. Note: at this stage of development – with only one major update, from v1.15 to v1.20 – it's probably not worth your while to get an update, it will be simpler to just read the notes on this page.
7/29/2011: Fannie Mae's 6/23/2011 get-tough threat to withhold new mortgages from strategic defaulters is now gone.
The threat never impressed me much anyway – with housing prices down and headed lower in 2012, home loans will be less risky, and private lenders will probably get back in the game. Now that Fannie Mae is scheduled to be out of home lending by Fall 2011, the threat is empty.
7/20/2011: California moves closer to becoming a true "non-recourse" state.
As of July 15, 2011, California SB 458 (Senate Bill 458) apparently limits the rights of junior lien holders (e.g. second mortgages, HELOCs) to sue for deficiency judgments when an underwater house is sold short of loan value. Note that the law has not been tested in court, and I find no provision saying that promissory notes on the side are banned – so, as before, watch what you sign, and run the papers by a real estate lawyer before signing them.
7/9/2011: Doctors now taking as little as $5 a month in payment.
In version 1.15, I wrote that the "$50-a-month club has become the $25-a-month club; pay a doctor that much and they will keep the bill in house rather than send it to collections." I'm now getting reports from both patients and doctors' offices of people paying as little as $5 a month. Seems weird, since most businesses can hardly afford to bill someone monthly for five bucks, but part of the deal seems to be that the patient just keeps sending the money every month without being billed.
7/5/2011: Clarifying legal and urban myths about "recourse" and "non-recourse" states.
(whether you can or cannot be sued for a deficiency judgment after walking away from a mortgage)
Albert Einstein famously observed that "Things should be as simple as they can be, but no simpler."
The terms "recourse state" and "non-recourse state" are too simple. I've bounced this one off numerous friends practicing law, and we all see it the same way: there are full recourse states, and then there are limited recourse states (I'm coining these terms as I write – a lawyer won't know them off the top of their head, though they will if you explain).
"Non-recourse" doesn't exist – if you sign a lender's cleverly worded promissory note while doing a short sale, you could end up owing them money, getting sued, and losing the lawsuit. Full recourse states sort of exist, if we mean there are no specific laws preventing lenders from suing for a deficiency judgment in your state.
Let's make it concrete, with the difference between Florida and California, since they are #2 and #1 in strategic defaults and walkaways.
Florida is a full recourse state; a lender can pretty much file a lawsuit for any type of loan secured by real estate. Mortgage deficiency lawsuits aren't growing as fast as I expected, but if they do, Lee County judges may be happy to ignore judicial rules of procedure and slam the lawsuits through by the dozen, giving the lender anything they ask for. (Lee County is notorious for its foreclosure "rocket docket," where judges rubber-stamp foreclosure actions.)
California, widely known as a "non-recourse state," is actually a limited recourse state. State law prevents a lender from suing over a walkaway if the loan is a purchase money loan. And California recently enacted Senate bill 931, which blocks lawsuits in short sale situations (but I haven't read it, so don't take that as a guarantee).
This leads people reading general media to assume they can default in California with impunity. Maybe, maybe not. It doesn't prevent the lender from suing over a second mortgage or a HELOC (Home Equity Line Of Credit).
Which is why I always recommend "You probably want to run it by a real estate lawyer first. Just a document review for a couple of hundred bucks. Don't let them sell you a bunch of useless services."
Which lead on to a note – in follow-ups I'm finding that lawyers are upselling people to:
• Short sales. A short sale only saves you from a 10-to-20 point hit on your FICO score, as compared to a strategic default. Now, in Florida a short sale could make very good sense – if the lender (or lenders!) will sign away their right to sue you for any deficiency.
If you're in California, and the only loan is a purchase money loan, why bother? You're already protected against deficiency judgments by state law – and if you carry out a short sale, a tricky lender could try to slip a clause into the papers that puts you back on the hook for any deficiency. So in California ... why would you physically leave the home and start paying rent before you have to?
• Deed-in-lieu deals with the bank. I've seen readers walk with a $10,000 check from the bank in hand for leaving early and with the home in good shape. Otherwise, again, why leave early? (And how many of those $ will the lawyer want for advising you?)
Sure, walking early might make sense if you can afford to leave 12-30 months worth of free housing behind, just to get the whole mess behind you. But a lawyer shouldn't be practicing psychiatry or life coaching. So just pay for the document review, and tell the lawyer you will think about his/her words of wisdom.
5/28/2011: In 2010, I wrote that "This isn't 1900, when corporate goons might kick your front door down and loot your house." This is no longer true.
Since early 2011, in foreclosure situations corporate goons might indeed kick down your front door and loot the house (with most of the reported instances coming from Florida) – in fact it's occasionally happening to people who don't even have a mortgage. Banks are representing these cases as isolated mistakes – and in this case the banks are probably telling the truth; the stories get a lot of media attention because they're sensational.
However, if you are in the foreclosure process, better safe than sorry – you may want to keep valuables in a safe deposit box or self-storage space. The same holds true if you live next door to a house in foreclosure, since the thugs might loot your house by mistake.
4/20/2011: Lawsuits over credit card debt are starting up again; they currently appear to be targeting the poor, and only in certain states.:
Collection litigation mills combining collections agencies and shyster lawyers have started up again in a big way, reminiscent of the 1980s, and are mass-producing lawsuits in the assumption that they will win most by default, since the debtor won't show up in court. So if you are sued, you almost always should show up in court.
This is primarily happening in New York, Minnesota, Illinois, and Ohio (update 2/18/2012, the www.newsregister.com reports Oregon is seeing the same frenzy). My gut sense, from reading the news stories, is that the debt collectors are targeting lower income people, since a lot of the amounts listed are quite small, like $300 or $1,100. This makes some sense: poor people rarely show up in court, so the attorneys can ram through 200 lawsuits in one batch. Sue someone upper middle class over $25,000, and they're likely to show up with their own lawyer, who will usually demolish a debt collector's poorly-documented case. If this gut feeling is correct, people who owe a lot (and/or live in an "upscale Zip code") will probably never hear from a collection agency's lawyers.
In this situation – debt collectors using the court as a "rocket docket" – it may not make much difference whether you're current on other credit accounts, since my gut feeling is that they're not doing any research before filing the lawsuits.
The current version is v.1.25, released November 4, 2011.
What if your own electronic version is outdated? Check the copyright page of your copy. If it's out of date, and you would like an an update, please email the publisher at
with your name and order date (approximate date OK if you give them the correct "ordered by" name), and ask for an updated copy (no charge). It will be sent as an email attachment, so if you don't have it within 48 hours, please be sure to check your spam/bulk/junk folders, especially if you have set up programs that block email from unknown addresses.
Best wishes in turbulent times,
Nicholas Carroll
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