Strategic Default in Illinois – Last man out of a dead condo complex

I get many calls and emails from my blog, mostly from people near or in foreclosure.

This week, I spoke with a guy who bought a condo in the city in 2006 (generally considered the market peak). Then, and now, he had a good job, but the Chicago neighborhood where he lives is overrun with foreclosures. The neighborhood  was “up and coming”  in 2006, but now it’s downright dangerous, he said.

In fact, he is now the only owner left in the 4-unit condo building, the other three owners having been foreclosed upon and the units standing vacant with no offers.

His mortgage amount: $275,000.00.  He was current in the mortgage payments. The biggest problem (among several) was that the other foreclosed units in the building were now on the market for $99,000.00! His unit was hopelessly “underwater” and it might take three lifetimes for him to get back to the price he paid in 2006.

We talked about the options and he admitted that he already decided on a “strategic default.”  A strategic default is when an owner quits paying on a mortgage when he or she otherwise could afford to pay and just walks away. Most of the questions I get now are from people considering, or in, strategic defaults.

He decided to quit paying the mortgage in June  and was going to move out right away, due to the unsafe neighborhood.  What are the consequences of walking away from this unit?

  1. Since this was his primary residence, the main effect of his coming default will be that his credit will drop to about 520 (FICO) and he will not be able to get another mortgage for at least two years (probably more like 5 years or longer).
  2. He will get a 1099 for the forgiveness of debt from the lender after the foreclosure, but since it is his primary residence there will be no tax due.
  3. We discussed that there is the possibility of the lender getting a deficiency judgment, but it was not likely. Illinois allows deficiency judgments, but few lenders are pursuing them. Most just issue 1099s and leave it at that.
  4. Walking away from a condo can be problematic because the condo association will file suit against you for the unpaid assessments (and will tack on their attorney’s fees). But, in this case, there was no condo association left to pursue him, so that was not an issue.

Strategic defaults are everywhere now (just take a look at the 400 plus comments in this WSJ story on Strategic Default). There are forums online for homeowners to discuss with each other the many aspects of a foreclosure.

I am especially surprised at the number of senior citizens considering strategic defaults. Many seniors on tight incomes maxed out home equity lines and are walking away from their homes (to rent) because market values dropped like a stone (but that’s another story).

In the next few posts, we will take a look at what homeowners in Illinois have to consider before going down the strategic default path? I am not encouraging strategic defaults and I think that this should be done as a last resort.

There is a debate on the morality of strategic defaults. Some say that strategic defaults are immoral and will drag down our system. I agree with Professor Brent White that in some cases a strategic default is not only morally acceptable, but the right thing to do.

Next: Q&A on Strategic Default in Illinois.

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12 Responses to Strategic Default in Illinois – Last man out of a dead condo complex
  1. LD
    July 7, 2010 | 10:48 am

    I kind of strategically defaulted. I moved, then tried renting out my previous residence and it was a disaster! I decided last year (5/09) to stop paying on the previous residence, put it up for sale, didn’t get ANY offers then the bank foreclosed. I still have a job, but couldn’t afford to pay 2 mortgages. I was very very worried about this at first, it caused untold stress and worry, but I’m at peace with my decision now. I know there will be consequences, but after crunching the numbers, it made sense to leave it. Even if I am subjected to a deficiency judgment (unlikely) or tax consequences, it will still cost less then the mortgage, so I come out ahead. The credit score has taken a hit, but so what? I’ll use cash from now on.

  2. tsammons
    July 7, 2010 | 5:19 pm

    LD, It’s a hard decision, but it sounds like this was your primary residence so the main problem for you will be the lower credit score. Tom

  3. AD
    August 1, 2010 | 7:40 pm

    Thanks for this post. I’m curious- if the bank sends you a 1099 after the foreclosure, does this mean that they have waived their right to pursue deficiency judgment–since the 1099 is for the loan forgiveness?

  4. tsammons
    August 2, 2010 | 6:56 am

    Abby,

    There are a few cases where banks have done both: 1099 and deficiency judgment.

    For example it happened in Amtrust vs. Fossett a 2009 AZ case.

    It’s very rare.

    99% of the time if a 1099 is issued, that is the end of it.

    Hope that helps.

    Tom

  5. George
    August 5, 2010 | 10:50 pm

    Im getting ready to do a Strategic Default on my condo as we speak. i was wondering if i should stop paying on my credit card too. The account has been closed for 2 years now and im just paying it down. Should i just stop paying that and try to settle since my credit is going to go down the tubes?

  6. tsammons
    August 6, 2010 | 6:52 am

    George,

    I would have to know more about your overall financial situation.

    Your choices on the credit card are: 1. Settle it out for a small percentage of what is owed, or 2.) File a chapter 7 bankruptcy.

    If you don’t do either of the above and quit paying on the credit card your wages could be garnished so be careful about that.

    Hope this improve for you.

    Tom

  7. Lynn Madison
    November 24, 2010 | 11:14 pm

    Just wanted to give an update on the issue of lenders pursuing deficiency judgements. Today – November, 2010 – the lenders are pursuing them whereas they may not have been when this was originally posted. Whether they would in this case I cannot venture to guess – but as a Realtor who is very involved with short sales and the training of agents on how to handle them I wanted to let anyone who reads this know that the lenders are really cracking down on strategic defaults and are pursuing those who do them.

    Best of luck you anyone who reads this – since you’re probably strugging – keep the faith – it will be OK. Get a good Realtor and a good attorney and let them help you.

  8. tsammons
    November 26, 2010 | 11:19 am

    Lynn, I can’t say that I agree that lenders are now pursuing deficiency judgments more than 6 months ago. Lenders are increasingly filing collection cases where there is a second mortgage, but deficiency judgments are still pretty much a non-issue. Thanks. Tom

  9. Lola Hos
    December 7, 2010 | 10:05 am

    Hello Tom,
    I own a small studio in Chicago,stopped paying the mortgage in June2010 due to several financial/personal issues.Got a great real estate agent and we started a short sale.Gave the bank ALL the required paperwork,and we were told that the bank needed to net at least $74,500.We got a buyer who was willing to pay $75,000 (cash offer!) and the bank came back yesterday (Dec6) saying that they wanted the cash offer…AND from me they wanted $2000 cash up front,and they wanted me to sign a note,saying I would pay $20,000 over 72months.
    I said no way (my agent agreed,he was furious with the bank) as I simply do not have any more assets.The bank simply replied that they were closing my file on the short sale and foreclosure continues.
    My agent (who is very experienced in short sales) had never heard of a bank behaving this way,but these days,anything goes with the banks.
    My question is: I got married during all this,and my husband had nothing to do with my studio,has never been there,is not on any paperwork,and we have separate bank accounts.Can the banks come after him?
    If I stop paying the assessments (I have since moved in with my husband in a rental,however I continued to pay all the assessments) can the association garnish my wages? I know they can sue me for unpaid dues,but read somewhere (online) that they can not do that until the amount reaches $1800.
    and lastly….did the foreclosure process start the day I stopped paying my mortgage (which was June 2010) and if yes,how much longer will it be until I am done with this mess?
    Thank you so much for your time,and I must say,your website is wonderfully clear and easy to read,compared to all the nonsense out there in the online community.
    Thank you!
    Lola

  10. tsammons
    December 7, 2010 | 1:54 pm

    Lola, The bank cannot take any assets from your husband if you leave all assets separate.

    Unfortunately, the associations are very aggressive and will usually file suit against you for unpaid dues. There is no limit of $1800 that I know of, it can be for any amount.

    Generally a Cook Co. foreclosure will take about 1.5 years from the time you miss the first payment, so you still have quite some time left.

    Thanks for the kind words and let me know if you have any questions.

    Tom

  11. Margaret
    December 10, 2010 | 11:05 am

    I am exploring strategic default. Is it possible for a bank or debt collector to garnish my defined benefit pension? I know from reading they cannot garnish 401k etc.
    And my Cook County taxes are due on the 13th of December. Was going to pay them today, but am wondering if I should if I do a strategic default soon.
    Thanks for your help.
    Margaret

  12. tsammons
    December 10, 2010 | 2:45 pm

    Margaret,

    Defined benefit pensions are exempt.

    But if the pension payment is mixed into your other funds it could be garnished, so keep it separate.

    Tom