Clueless Is Concerned About What The Lender May Do If She Pays Off A Loan From Her Parents While Pursing A Short Sale On Her Underwater Home

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Hello. My husband and I are currently in an "underwater" mortgage. Our loan was for $262,000, which we have paid down to $253,000. The general consensus of realtors, is that we should be able to get between $215,000 and $220,000 for our home. Our mortgage is with Bank of America. We hare hoping they will forgive this amount and allow us to complete a short sale. My question is in regards to a savings account that we have. I had a $30,000+ student loan. The rates on the loan were going way up, so my parents took out a home equity line of credit, several years ago, and to pay off the loan. Here's where I made a mistake. Instead of making monthly payments to my parents, I have been putting money into a savings account, with the intention of transferring the money to my parent's account, when I had saved the total amount that I owed them. In this savings account, I have the exact amount that the payoff of the student loan was. It's not money I'm trying to hide from the bank. It's money that I rightfully owe my parents. However, I understand that if I close the savings account, obtaining a check for the full amount in the savings account, that would thus be deposited in my parent's account, it will look very shady to the bank. In other words, I am preferring to pay my parent's back the total amount of my student loans, yet ask the bank to forgive a similar amount on my mortgage. How can I LEGALLY safeguard this money? I don't want to put myself, and more importantly, my parents, at risk for what could be easily MISunderstood as a fraudulent transfer (which could mean fines, restitution orders, probation, imprisonment, crime, etc...) I've asked this question to someone a few days ago, and they dismissed me, as if I were asking them to take part in something illegal. I have the student loan payoff documentation, as well as all the payments that were ever paid on the loan, which was by my parents. It is a valid debt to my parents. I don't have a certified letter stating that I would pay my parents back by a specific date and time, etc, etc.... I have great parents and they knew I would repay them. I never thought to compose a payback agreement, for goodness sake. I also never expected to be in an underwater mortgage. My parents have helped us for the past few years, when the mortgage companies have repetively turned us down for refinancing or streamling of our loan, because we weren't delinquent on our payments. It's frustrating. My parents deserve way more than simply the money from my student loan. I want to pay them back, at least for the student loan, before we lose everything, including our credit rating, in a short sale, or deed in lieu situation. I've received a whole spectrum of advice...including not reporting that I even have that savings account to putting the money in an IRA. But it still seems to me that the bank will find this money. Could I take my husbands name off the account and add my dad's name? If my dad's name was on the account with my name, would that prevent the bank from being able to take the money? UGH...please, please help me. There are so many terms being thrown at me and so many laws...I am confused, overwhelmed, and feel stuck in a terrible situation. Please help me. I would appreciate any advice you can provide.

Thank You In Advance

Clueless

Get Answers…

Dear Clueless:

Yes, it is true. When seeking a short sale from a lender, the lender requires disclosure of your finances. I do not recommend that you try to "hide" information from the lender. If the money is in the savings account when and if a lender agrees to a short sale, then a lender has the right to the money and an expectation that you will use the savings to pay the remaining debt.

If you owe a debt to your parents then you should pay them back. As long as there is an agreement between your parents and yourself re: the loan, then why not honor the terms of the loan and pay back your parents. It seems that this loan predates any deficiency with the lender.

A fraudulent transfer normally means that money and/or assets are moved around in order to prevent a creditor from collecting on a valid debt.

You are asking great questions. Once again, if you have a valid loan agreement between you and your parents then pay your parents back. If not, then you must be upfront with the lender and negotiate how much of your savings the lender is willing to let you keep.

Of course, let me add that you can and should seek the advice of an attorney and/or accountant in your state. This way you can properly explore all legal and financial options.

Good luck. I am confident you will work it out.

Thanks.

Augustine Diji

KC Is Prepared To Strategically Default But Not Sure

GOT QUESTIONS?

To Whom It May Concern:

I read your website on Strategic Default and would like to put forth our situation to hear your opinion. We purchased a condo during the condo conversion craze in So. Florida in 2005. Purchase price for a 2/2 in a highly sought after area was $178,000. We put 20% and did a 7 year libor interest only. We pay our taxes separately each year. After having closed with the lender referred by the developer's sales office (Countrywide), we found out later that the association had over $250,000 in liens that were against the developer for various maintenance improvements prior to converting units and from the city for infringing on landscaping regulations. The association hired an attorney who is actively dealing with this but in the meantime, Hurricane Wilma hit and the condo association suffered tremendous damage (still has roof damage that is unrepaired). Meanwhile, we continued paying our association dues($400/mo) and additional assessments ($4000). We have lost our water and cable vendors due to inability of association to meet its debts,therefore, those costs are now incurred by condo owners (they did not reduce assoc. fee since attorney states that condos are still "underwater" with debt). The unit is now worth $71,000 according to Bank of America (I inquired to see if we qualified to refinance-they won't). In some cases, units are being bought for $30-$40K/ea by investor groups. We have totally refurnished our unit, tile, granite, new a/c, new appliances, paint, etc spending over $4000 and we can't even declare it as a loss on our taxes b/c of my husband's income bracket ($250K/yr). We own three other properties, have great credit -780 score, never have been late on a payment and have our properties rented out. In the case of the condo, we are losing about $150/month since we had to rent at a discounted price to compete with rental market. I inquired with Bank of America who assumed the condo note from Countrywide and they could not recommend any department that could qualify us for principal reduction. The only good news that may or may not happen is that the libor index may go down in July when our rate adjusts. We are willing to strategically default just because we will never recuperate our investment and the condos are falling apart (100 out of 340 units are in foreclosure). The property management company and board of directors are no help at all. The attorney is not responsive to inquiries. What would you do?

Best regards,

KC

GET ANSWERS…

Dear KC:

We agree, it is likely you will never recover your investment in the condo, so what is the point of throwing money down the drain. Your mortgage balance is about $142,400.00. This is much higher than the $71,000 value of the unit. It may be less; you said investors are paying $30k to $40k per unit. There is no positive cash flow. Your possible upside to continue making payments may be mortgage interest deductions and/or depreciation deductions. You stated you are unable to declare a loss. On top of that the property and the surrounding development will continue to lose value due to the associations’ financial problems and the damage to the properties in the development/community.

First things first, KC. You and our husband should ask yourselves the following questions?

1. What is the impact of this investment on your cash flow? You said you are losing $150 per month. This is at least $1800 a year, $9000 after 5 years and $18000 after 10.
2. What is the impact of this investment on your cash savings, retirement funds, IRA, or any other investment? Do you have to “dip” into your savings to pay your bills?
3. When will a good credit score be important to you? Do you need more credit? Do you need to do anything requiring a good credit score? If so when? Will poor credit negatively affect your jobs or business?
4. Do you understand all of the risks of strategic default? If not, please read these links – When A Homeowner Stops Paying To Get A Loan Modification and What Everyone Should Now About Debt Forgiveness, Obligations, and Deficiency and Plan to Be Followed When You Walk Away From Debt.
5. What are your short and long term financial goals? Are you near retirement?
6. Can you find a better use for the money?
7. Can you get a better return if your money is put to a better use? Will the “better return” be greater than the financial cost of strategically defaulting?
8. Do you know the time line from when you decide to stop paying a lender until a lender can successfully recover a debt? Did you know it can take a lender months or years to collect depending on the circumstances?
9. What about the homeowner’s association? Do you face any legal risk for non-payment of monthly charges and fees?
10. Are you prepared for the creditor harassment? Phone calls, letters, and possible legal threats? Are you prepared to fight back against this? Please refer to the Fair Debt Collections Practices Act to learn more about federal debt collection rules and regulations. There are other laws that protect you and govern the collection of debt.
11. Did you explore all of your available options – short sale, loan modification, refinance, principle reduction, or deed-in-lieu of foreclosure?
12. Did you know that any time the terms of a loan are changed, in any manner; it will negatively affect your credit?
13. Did you know that a drop in your credit score may impact existing credit cards and/or loans? For example, you could see a rise in credit card interest rates or a reduction in credit card limits or home equity lines once you decided to strategically default. Check out the recently enacted Credit Card Accountability, Responsibility, and Disclosure Act of 2009.
14. Do you know how to legally protect your assets, savings, and cash flow from creditors? Are you prepared to do so?

So to answer your question “What would you do?” depends on how you answer the above questions. Feel free to follow up with further questions after you and your husband talk.

Thank you.

Augustine Diji