This article in the New York Times has me seeing red. On one hand, it is a good piece of reportage. It describes the current level of defaults on home equity loans, contrasts them against other types of debt, and discusses how some homeowners are proceeding in an unsure economic climate.
On the other hand, the article's underlying premise is dangerous, at best. It describes a lending regime where banks are unable to collect the debts that are owed to them. It describes people simply defaulting on their loans and walking away, confident or hopeful that the bank won't pursue them for the difference between the value of the loan and the value of the property.
No matter how many billions of dollars that banks write off as uncollectable, and no matter how many anecdotes the article offers, the personal obligations people face on their equity loans can last up to seven years. This means that just because nothing has happened for 18 months, there are 66 months remaining on the clock. Hoping that there is "safety in numbers" won't prevent someone from attempting to collect the debt.
Many home owners are engaging in strategic defaults. Doing so without a plan can expose you to significant personal liability, not to mention seriously impact your credit score and possibly your tax liability. While many people are simply filing bankruptcy, if you do not qualify for a Chapter 7 discharge, you will be forced to repay that deficiency balance in a Chapter 13.
If you are planning to walk away from a mortgage or home equity loan, you should plan your strategy carefully. Consult with a few qualified attorneys. Some will suggest bankruptcy. Some will suggest various loss mitigation tactics. Consult with an accountant. Build a plan for your future before simply walking away. Articles like this make it seem as if there is a free-for-all afoot. Just remember: the exception is generally NOT the rule.
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