What is a strategic default? A strategic default is when a borrower makes a decision to stop making payments. Generally this term applies to residential and commercial mortgages. Strategic default generally takes place after a substantial drop in home price wherein the debt is considerably larger than the value of the property. Some people call this “under water” or “negative equity.”
Should I consider a strategic default lawyer: According to Strategic Default and Trial Lawyer, Gary A. Newland who has been involved in several class actions against banks, “over 80 percent of the time the banks or mortgage brokers have deviated from their legal responsibilities and are in fact responsible for the collapse of the real estate market. Furthermore the system is set up so that banks often times will not modify a loan without a default. The consumer must ask themselves what are my options. Will the bank modify, allow a deed in lieu, or permit a short sale if I am current? The reality is the banks often times do not listen unless there is a default.”
Economists have also recognized that a strategic default can be an effective method of resolving issues with a bank, especially since the finance and property bubble of 2006. It is a fact when people are overwhelmed with debt they tend not to be consumers and that hurts the entire economy and families. Strategic default for some is the only option they have and people are starting to fight back. In fact, according to Experian, a credit reporting agency, approximately 1/5 of troubled mortgages in the U.S. involve borrowers who are strategically defaulting. The effects of strategic default may vary with respect to the jurisdiction and whether there is non-recourse debt or recourse debt. Non-recourse debt would mean the lender does not have a right to pursue the borrower personally. Often times through foreclosure defense a deficiency debt will be waived by the bank even when there is recourse personally for the loan.
Strategic default inevitably results in a negative credit rating and may impact the borrower’s ability to obtain a loan in the future. There can also be income tax issues as well. It is important to consult an accountant when considering a strategic default.
The law does not see a strategic default as immoral, in fact, contract breaches are considered amoral and it is understood that obligations to honor one’s responsibility to their family can outweigh responsibilities to financial institutions. Many rightfully so blame the financial institutions for the crisis that has resulted in strategic defaults. If you have any questions regarding strategic defaults contact the law firm of Newland & Newland, LLP.