Chicago Foreclosure Lawyer Blog

I've written about the "just walk away" movement before. I've pointed out that the "safety in numbers" theory is flawed -- there may be too many people to come after right now, but lenders have quite some time (seven years or more, depending on the facts), to come after you for a cash judgment. I've pointed out that the effect on your credit and ability to rent may be greater than you think.

This latest "walk away" article at the Huffington Post has given me something new to talk about. Ryan J. Downey opens his article with a great attention-grabber:

I made my last mortgage payment on November 1, 2009.

Bank Of America changed the locks on my house on September 29, 2011.

Almost two years mortgage payment/rent-free? Sign me up!

Before you start making origami cranes out of your mortgage statements, let's take a closer look at his article. Page one describes Mr. Downey's failed American Dream with the bravado of 20/20 hindsight. While recounting his tale, which is all-too-familiar for many Americans, he quips about the inefficiencies of First Franklin's staff, the lack of assistance from Washington, and other issues.

He is 100% correct. Too big to fail has become too big to function. Trying to obtain a loan modification or other assistance from a lender or servicer has been and continues to be a Byzantine process full of red-tape and incompetency. So far so good, right?

Downey debunks the "moral hazard" arguments we've all heard in the media. He does it succinctly and to great effect:

The banks call it "writing off a bad investment." But when a private citizen does it, we're scum? Please.

I have made the same points on this very blog. So why do I think this article could be misleading? The answer lies on page two.

Downey's home was located in Riverside, California. California is a non-recourse state. This means that banks can only repossess your home, they cannot pursue for a deficiency judgment. Again, they cannot collect a single red cent from you. There may be exceptions to this rule, but I am not a California attorney.

On the other hand, Illinois is a recourse state. The Downeys of Downers Grove are personally liable if they default on their underwater mortgages. That liability will take the form of a deficiency judgment. In the case of a wholly underwater second mortgage, it may take the form of a lawsuit for the full value of the second mortgage.

To make matters worse, you can never be sure whether you will be pursued or not. While the common folklore in Cook County, Illinois is that lenders don't pursue deficiencies in Chicago, don't expect this to hold true for very long. Bank of America just imposed a $5/month fee for using your debit card. As the #OccupyWallStreet movement gains steam, the financial sector is screaming about class warfare. And well they should, because they know their own creation.

There will come a day in the not-too-distant future when lenders will aggressively seek deficiency judgments. You see, the folks who walked away early are starting to recover their credit. They may even find the means to purchase a new home, albeit one at a realistic value and a more traditional loan structure. Those people will have properties ripe for a judgment lien.

The people just entering foreclosure now may find themselves ending the process with a wounded bank on the other side of the "v." Have you ever seen a huge animal that is injured, scared, and angry? Expect similar behavior from lenders as they scramble to recover whatever they can to keep their balance sheets in the black.

To reign the invective back in a bit, much of the "walk away" movement is founded on real frustration and an accurate picture of what's happening for the haves vs. the have-nots. A lot of these folks live in states that provide them immunity beyond a shattered credit score and the loss of their home. Illinois does not.

There are three sure-fire ways to protect yourself in Illinois: 1) Deed In Lieu of Foreclosure; 2) Consent Foreclosure; and 3) Bankruptcy. If you are ready to ditch your home and don't want to risk a deficiency, those are your best options.

Simply walking away in Illinois is a bad idea. It may work for some, but in the end, truly managed risk requires a bit more effort.

As the person who often deletes spam comments on this blog, I have been discovering that many of them are posted by other firms that engage in bankruptcy practice. Our firm also handles bankruptcy cases, but generally separately from our foreclosure defense practice.

Here is the obligatory disclaimer: We are a debt relief agency. We assist people with filing for relief under the Bankruptcy Code.

My own concerns about the ethical implications of comments that do not provide this disclaimer aside, I feel that it is important to give it before the jump. After the jump, I will talk about bankruptcy vs. loss mitigation strategies and when they are most effectively used.

Continue reading "Bankruptcy vs. Loss Mitigation" »