What is a Strategic Loan Default?

 Posted on May 15, 2024 in Foreclosure

The housing market crash of 2008 left many Illinois homeowners "underwater" on their mortgages, owing more than properties were worth. In this situation, some borrowers may consider a "strategic default" - intentionally stopping mortgage payments even if they can afford them. But what exactly is a strategic default, and what are the potential consequences for borrowers? An Illinois lawyer can help you take a closer look at strategic loan defaults and what you need to know.

What is a Strategic Loan Default in Illinois?

A strategic loan default, also known as a strategic default or voluntary foreclosure, is when a borrower deliberately stops making mortgage payments on their home even though they have the financial ability to continue paying. This is typically done when the home's market value has dropped substantially below the outstanding loan balance, leaving the borrower "underwater" on their mortgage.

Strategic defaults rose in popularity after the housing market crash, leaving many homeowners owing far more than each property was worth. Some borrowers made the calculation that it was in their financial best interest to simply walk away from the home and mortgage rather than continue paying. However, deliberately defaulting on a home loan can have serious legal and financial consequences that you need to be aware of.

Consequences of a Strategic Default

Deciding to stop paying your mortgage voluntarily is a major decision that should not be taken lightly. Some of the potential repercussions include:

• Foreclosure - If you default on your mortgage payments, the lender can initiate foreclosure proceedings to take possession of the property. In Illinois, most foreclosures are judicial, meaning they are processed through the court system. You will be served with a complaint and summons, triggering a legal process that typically results in losing your home to foreclosure unless you can work out an alternative with your lender.

• Deficiency Judgment - If your home is foreclosed on and sold for less than what you owe on the mortgage, the lender can seek a deficiency judgment against you. This allows the lender to collect the deficit amount from your other assets and income, above and beyond taking the house itself. The lender has three years to file for a deficiency judgment.

• Credit Damage - A strategic default will severely damage your credit, just like any other default or foreclosure. It can stay on your credit report for approximately seven years, making it difficult and expensive to borrow money for things like a car or another home. You may also have trouble renting since many landlords check credit.

• Tax Liability - Historically, the IRS considered any canceled mortgage debt taxable income. However, the Mortgage Forgiveness Debt Relief Act of 2007 changed this for many borrowers. You should seek guidance from a tax professional for your specific situation.

Is a Strategic Default Ever a Good Idea?

With all the potential downsides, a strategic default is rarely advisable legally. Suppose you are struggling to make your mortgage payments. In that case, you are usually better off being proactive and working with your lender on a loan modification, short sale, or deed instead of foreclosure. These options are still damaging but often less so than a strategic default and full foreclosure.

However, every situation is unique. If you are considering a strategic default on your Illinois home, consult an attorney first to understand your specific circumstances' legal and financial implications. An attorney can help you assess your options and make an informed decision that protects your interests.

Contact a Gurnee, IL Foreclosure Lawyer

Strategically defaulting on your mortgage is a risky move that can have long-lasting legal and financial consequences. If you are struggling with an underwater mortgage, you should carefully weigh your options and work with a Lake Forest, IL foreclosure attorney before voluntarily stopping making payments. While it may seem tempting to walk away, a strategic default is not a "get out of jail free" card and may ultimately do more harm than good. Call Newland & Newland, LLP at 847-549-0000 for a free consultation.