Strategic Default in Illinois: Q&A

One client had no problem deciding to strategically default on his Chicago condo due to a triple-witching hour of crime, an abandoned condo complex and a declining market that left the unit worth one-third what he originally paid. For most people, though, the decision to walk away from a property is not easy. Here are some common questions about the process:

What will happen to my credit score and when will I be able to buy another house?

Your FICO score will drop to about 520 when you miss about three mortgage payments. You can get an FHA mortgage with a score of about 650 and over 720 is considered “good” credit. How quickly you rehab your credit is up to you. It will take a minimum of two years to be able to get another mortgage and it may take as long as five years.

Do I apply for a loan modification first?

You can certainly try to apply for a loan modification under HAMP. It is unlikely that your loan modification will be approved and I pretty much consider it a waste time. Some say that HAMP is basically dead, a failed program. Loan modifications are for people who want to stay in their homes.

Should I try a short sale first?

Some owners try a short sale first. Most short sellers are behind on the payments already and are near or in foreclosure. If the property is an investment property, you absolutely should try a short sale first because it will lessen the tax impact.  Many owners can’t stand the thought of the many delays inherit in a short sale.  I think it is smart to at least try a short sale first in most cases.

Once I quit paying the mortgage, when will a foreclosure be filed?

Usually, the foreclosure case is filed about 4 months after the first payment is missed.

Do I have to accept the summons and will they serve me at work?

For the owner, the day the sheriff serves the summons and complaint is a very dark one. The abstract becomes real and owners get very upset by this. A plain-clothes officer will ring the doorbell and ask if you are you. Then the officer hands you the summons and complaint and walks away. Generally, the sheriff will try to serve the summons for about two weeks and then they quit trying. After they quit trying to serve you personally, they will serve you by publication (meaning a notice is published in a legal newspaper). Owners are not supposed to evade service of process by refusing to answer the door (many do). In general, most process servers don’t try very hard to serve the summons. I find that lenders usually will NOT try to serve you with the summons at your work.

Do I have to respond to the complaint and file an appearance after the sheriff serves me?

In most cases, it is not necessary to file an “appearance” with the court or to appear in court. In fact, filing an appearance submits you to the court’s jurisdiction and will allow the lender to get a deficiency judgment against you. Ninety percent or more of foreclosure cases are “default judgments” where the defendant does not appear.

Do I have to go to court?

For some reason, owners want to go to court to explain the case to the judge. This is not necessary and not productive. The judge is overwhelmed with cases. There is no reason to go to court in 99% of strategic default foreclosures.

How long can I stay in the home without paying?

In most cases, an owner can stay in the house without making payments for one year from service of summons. It can be as short as ten months or as long as two years, but one year is about average.

When do I have to hand over the keys?

Some lenders actually call you early in the process to “make arrangements to pick up the keys.” This amazes me, since they have no authority to ask for or to take the keys. They are hoping that you will just turn the keys over. Generally, possession is given to the lender after the sheriff’s sale is confirmed by the court. This takes about one year from the time you are served with the summons. Most owners leave much earlier in the process because they find it too hard to continue to live in the house. You will have to leave the house once the order of possession is entered. If you don’t leave then the lender can file the order with the sheriff and have you evicted, which is a very unpleasant thing that I would not wish on anyone.

Do I have to keep paying the homeowner’s insurance and taxes?

If you are still living in the house, you should keep the homeowner’s insurance in effect since it covers all of your personal property. Once you leave the house, there is no reason to continue paying for homeowner’s insurance. Most owners stop paying the real estate taxes (if there is no escrow) once they stop paying the mortgage. It takes about three years to lose a home for unpaid real estate taxes.

Do I have to pay for utilities?

Yes, all utilities are personal bills and the utility will file suit against you if you don’t pay.

Does it matter if I am served personally or by publication?

Yes, if you are served personally the lender can get a deficiency judgment against you. If you are served by publication, the lender can’t get a deficiency judgment. For more about deficiency judgments, see here.

Does it make any difference if I own a condo?

Yes, it does. If you are planning a strategic default on a condo, the condo association will file a separate lawsuit against you for the unpaid condo dues. So you may have to settle that case or continue to pay the dues until the condo foreclosure is final.

Can the lender sue me for deficiency judgment?

Most foreclosure complaints ask for deficiency judgments. This means that if the lender sells the property at the sheriff’s sale for less than you owe, the lender can try to collect this deficiency from you. Most lenders in Illinois are not seeking deficiency judgments. More information on deficiency judgments is here.  The lender can get a deficiency judgment against you AND 1099 you for the forgiveness of debt, but this is pretty rare.  Most lenders 1099 you for the forgiveness of debt and leave it at that.  However, if you have a second mortgage it is possible that the lender will file a collection case against you. In my opinion, this is a much greater threat than  a deficiency judgment.

Will the lender take my other assets or file a wage garnishment after the foreclosure?

Yes, they could, but it’s rare. If a lender gets a deficiency judgment, the lender could garnish your wages or try to take other property from you. The lender cannot take IRAs, 401ks or life insurance. I have never seen this happen.

Will I get a 1099 after the foreclosure?

Yes, lenders are required to send a 1099 for forgiveness of debt after a foreclosure. Read more about the 1099 issue here. If the property foreclosed was your primary residence then you file form 982 and this makes the income from the 1099 nontaxable.

Will I get 1099’d if I walk away from an investment property?

If the property was an investment property, then you will get 1099’d. Unfortunately, you have to claim the 1099 as income, unless you filed bankruptcy BEFORE the 1099 was issued or unless you can show you are insolvent. Walking away from an investment property has severe tax consequences and you should do everything possible to avoid doing so.

Will I need to file for bankruptcy?

Most likely you will not need to file bankruptcy. Generally, you file a chapter 13 bankruptcy to keep your house, not after a strategic default. You file a chapter 7 bankruptcy to get rid of credit card debt and other personal bills. The only reason to file bankruptcy after a strategic default would be in the unlikely event that the lender got a deficiency judgment against you, if a second mortgage holder filed a collection action against you or if you defaulted on an investment property. The chapter 7 bankruptcy would be needed after a strategic default on an investment property, and the case must be filed prior to a 1099 being issued for forgiveness of debt. Filing bankruptcy after a 1099 is issued will not work.  A chapter 13 bankruptcy can be useful if a homeowner has a high income or other assets that he or she wants to protect. The homeowner files the chapter 13, “surrenders” the home in full satisfaction of the debt and gets rid of any deficiency judgment and tax consequences that way. There will be some payments that have to be made to the bankruptcy trustee but those depend on income, assets and other debts.

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Related posts:

  1. Strategic Default in Illinois – Last man out of a dead condo complex
  2. Foreclosure and deficiency judgments
  3. Lenders seeking money back after short sale
  4. Unwelcome surprise: 1099 after foreclosure and short sale
  5. Investment property: When to file bankruptcy in a short sale or foreclosure

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