Walking Away From Mortgage(s) Can Hurt You in the Long-Run

This is the original post and content of the Wink & Wink bankruptcy law firm of Denver, Colorado.  The topic is timely here in Michigan as many homeowners and divorcing couples, struggle to keep their homes.

Strategic Default. You Walk Away. “Should you walk away from your underwater mortgage?”

These phrases have been reaching fever pitch in the news media lately because of the continuing economic crisis and its huge toll on house values nationwide. The gist of the idea is that if your house is underwater, chances of you ever regaining the equity you have lost are slim to none. However, the media seems to be silent with regard to the risk of deficiency judgment, which often lurks out there like a predator waiting to attack!

The thought of continuing to pay the debt on your mortgage, knowing that your house is now worth much less than the amount you will be struggling to pay for the next few decades, drives people to look for a way out. This is the reason “strategic default”, which occurs when people stop paying the mortgage, even though they can technically afford to keep paying. Because the housing market is in the dumps and appears unlikely to bounce back anytime soon, ‘strategic default’ is becoming more and more common. So common, in fact, that it has been linked to the recent uptick in consumer spending.

The decision to walk away is definitely a way out from underneath that mortgage. But it does not come without a cost. This is because when you walk away, you aren’t simply leaving the debt behind. Oh, No. In most cases the debt is likely still following you, stalking you. Waiting to pounce. Walking away from your mortgage has consequences in most states, such as Colorado, and they go by the name of a deficiency judgment.

What Is A Deficiency Judgment?

When you take out a mortgage, or two, you are liable on the note or deed for that debt in the amount your contract states. When you stop paying your mortgage (either strategically or because you can no longer keep up with the payments) the end result in most cases is a foreclosure sale of the property. At that foreclosure sale, the property is sold, usually at a loss.

If the property is sold for less than you agreed to pay on the mortgage, you are still liable for the difference—the deficiency—between what you agreed to pay by contract and what the lender received through the foreclosure sale. So, if your mortgage is for $300,000 and the property sells at foreclosure for $250,000, you are still liable for the $50,000 your lender is still owed under your mortgage contract.

When you have two mortgages, a first and a second, what often happens is that the first lender often “bids the note” at the foreclosure sale, which means they purchase the property for the same amount as the note. This means there is no deficiency as to the first mortgage. However, it also leaves the second mortgage lender unfulfilled, and holding a claim against you for the entire amount of the second mortgage. (Don’t forget that all these amounts generally increase as a result of the fees and charges that get tacked on as a result of the foreclosure process. They never miss an opportunity to lop on some fees!)

A deficiency judgment is what happens when one of the lenders to which you owe a deficiency decides to sue you to collect on that amount. After the lawsuit, the amount gets converted into a judgment against you, a deficiency judgment. And in Colorado, where I practice bankruptcy law, the holder of a deficiency judgment can garnish your wages – 25% of your wages, to be exact. That is not a risk to be taken lightly.

How Likely Is A Deficiency Judgment?

You may be thinking “but I haven’t heard of anyone getting sued for a deficiency judgment.” And at this point in time, this is mostly true. But this is changing, see “Lenders Pursue Mortgage Payoffs Long After Owners Default”.  The predators (eh..I mean creditors) are getting hungry!

What is very likely to happen with the huge amounts of deficiency claims lenders are sitting, and that will continue to pile up as the foreclosure rates soar (yes, foreclosures are still spiking, we are far from out of the woods yet) is that lenders will begin to package these debts and sell them to third-party collection agencies, just like the credit card companies. When that starts happening, everyone who though they got out Scott-Free will have to face a painful reality. And they have plenty of time to wait to nail you, too.

In Colorado, they have Six years to wait before they sue you. Six years to sit back and wait to get there ducks in a row, maybe even wait for you to start earning more money, and then Whammo! You’re served a Summons to appear in court and you end up with your wages garnished or your bank account seized to satisfy the judgment.

Bankruptcy Can Shut the Door on a Deficiency Judgment

Bankruptcy generally removes your liability to repay the note on your home. So, whether you file for bankruptcy before or after foreclosure, the lender cannot pursue a deficiency judgment against you. If you file after the deficiency judgment is secured, the bankruptcy can still wipe out your liability for the judgment. It can even stop the garnishment if the lender has proceeded to that level.

All of this means that you should consult a bankruptcy attorney if you are considering defaulting on your mortgage.

For most other people, stopping mortgage payments on an underwater home is not a choice. It is something that the current economic situation has forced them into, and the idea of bankruptcy is likely part of the mix, along with rising credit card debt and stress levels.

However, for the true “Strategic Default”, where the decision to stop paying the mortgage is made even though the money to pay the mortgage is there, bankruptcy is usually the last thing on the radar. Most in this position look at the default as a business decision. They made an investment, it went belly-up, and they are cutting their losses. However, even “strategic” defaulters should take the time to understand their rights.

Bankruptcy can not only shut the door on a possible deficiency judgment, enabling you to move forward without worrying about what lurks behind, it can help you rebuild your credit faster. Think about it – if you walk away from the mortgage without filing for bankruptcy your credit takes a hit (foreclosures stay on your credit report for 7 years) AND you still may be liable for the deficiency, just when you are getting back on your feet and have regained your credit score. If you file for bankruptcy, you get rid of any chance of a deficiency judgment, wipe out any other dischargeable debt you’re struggling with, and start rebuilding your credit from day one.

Additionally, if you plan it correctly you can live in your house rent free until the foreclosure, which in Colorado usually means 8-12 months.

The bottom line is to be prepared, have a plan and explore your options. Walking away without knowing the risks exposes you to what I like to call the stalking predatory of the deficiency judgment. It’s only a matter of time before these debts start being sold to collection agencies, and with those creditors – you need to watch your back!

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Posted in: bankruptcy,Bloomberg,creditors,deficiency judgment,mortgage,short sale,strategic default

Texting While Driving Soon Illegal in Michigan

Distracted driving takes lives.  Many adults have experienced that sick feeling of guilt and relief when you realize you've crossed over the center-line because you were checking your cell phone.

For most of us, we swerve back to our lane, hoping for the best and, statistically, you're fine; you continue to your meeting or appointment.  Others, however, are not so lucky.  Many injuries and deaths result as the incidents of distracted driving sweep over our state's roadways.

The cause is the now-ubiquitous cell phone and our seemingly insatiable need to "stay-in-touch" with everyone and everything at all times.  The electronic criminal lawyer posted on this subject last spring, speculating that it would not be long before the law catches up with our irresponsible habits.

The Michigan Senate has already passed the main legislation and Governor Granholm has indicated she plans to sign the legislation immediately into law.

The proposed fines are $100 for a first offense and $200 for a second offense.  The House of Representatives are now working-out how violations will be recorded by the Secretary of State on a driver's master driving record.

Stay tuned and put your cell phones down when you are driving.

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Posted in: cell phone,distracted driving,Governor Granholm,master driving record,Michigan House of Representative,Michigan Senate,Secretary of State

Interview with Michigan Supreme Court Justice Maura Corrigan

In 1989, I completed an 18-month stint as a research attorney with the Court of Appeals.  My next job was an associate attorney position in the appellate section of Plunkett & Cooney, then a Detroit-based firm.  Another attorney that joined the firm at the same time was Maura Corrigan.

At the time, Corrigan narrowly missed a choice (political) federal appointment as the U.S. Attorney for Detroit in the Bush 41 era.  It was a professional perk to work alongside Justice Corrigan for two-years before she was appointed to the Court of Appeals; subsequently getting elected to the Michigan Supreme Court.

In yet another example of how fast and wide legal information is spread via the Internet, an excellent podcast series known as "Assistance of Counsel" kicks-off with an interview with Justice Corrigan.  Assistance of Counsel is the product of former-Oakland County Prosecutor Paul Stablein, a partner in the Royal Oak firm of Flood, Lanctot, Connor & Stablein.

Stablin says, over time, the other Justices will be interviewed along with jurists from all levels of our legal system.  What a fantastic resource to learn about who our elected jurists are, and what they think.  

Good luck with the podcasts Paul; and keep your informative posts about our state's great common law tapestry coming.

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Posted in: Justice Maura Corrigan,Michigan Court of Appeals,Michigan Supreme Court,Oakland County Prosecutor,Paul Stablein,Plunkett and Cooney,U. S. Attorney

Same-Sex Marriage Cases Go Constitutional

A federal law suit filed last year by two California same-sex couples (one gay; one lesbian) has raised constitutional issues in the gay marriage context and is unfolding in a momentous trial.  In Massachusetts, another federal case tests whether a federal statutory provision containing a sexual-preference distinction is constitutional.

The complaint in Perry v Schwarzenneger, filed in the Northern District of California and assigned to Judge Vaughn R. Walker, has high-powered lawyers seeking far-reaching relief for the rights of (gay) individuals.  The case is another chapter in the tumultuous evolution of Californian sex-gender politics.  The "all-in" nature of the Perry case, however, will have effects that touch most families in America.

You may or may not recall that back in 2004, the newly-elected young and dashing San Fransisco mayor Gavin Newsom made an international splash by presiding over same-sex civil marriage ceremonies conducted at City Hall.  The California Supreme Court squashed the practice in about 30-days, voiding all the marriage licenses issued as a result of Gavin's project.

In a May 2008 change of course, the California Supreme Court decided (4-3) the case known as In Re Marriage Cases, holding that any California laws, "that treat persons differently because of their sexual orientation should be subjected to strict scrutiny..."  The California high court decision also effectively preempted proposed state legislation seeking to ban same-sex marriage on the grounds the initiative violated the California constitution.

Six months later, in yet another change of course, the California electorate (narrowly) approved Proposition 8, defining marriage as between opposite-sex couples only.  The California Supreme Court swiftly followed suit in Strauss v Horton, upholding the passage of Proposition 8, but applying that referendum prospectively, thereby preserving the approximately 18,000 marriages that had been performed prior to the passage of the referendum; and perhaps unwittingly creating an arbitrary class of persons to which other gays can point in an equal protection analysis.

Enter the lesbian couple Kris Perry and Sandy Stier (Berkeley) and gay couple Paul Katami and Jeff Zarrillo (San Fernando Valley), pictured in the above link emerging from the federal courthouse following the first day of court proceedings.  The couples, very carefully selected by well-funded and well-connected gay rights activists, were apparently up for the arduous task of prosecuting constitutional federal litigation.  Neither couple were among the tens of thousands to take advantage of the narrow 6-month window to obtain a marriage license in mid-2008, making them ideal constitutional-litigants.

Some gay rights activists have criticized the suit as premature and ahead of the public opinion curve on the same-sex marriage issue.  While the concept seems to be gaining ground in abstract opinion polls, to date, only 5-states allow same-sex marriages:  Connecticut, Iowa, Massachusetts, New Hampshire, and Vermont.  On the other hand, 29-states (including Michigan) have amended their Constitutions to outright ban gay marriage by defining a marriage as between a man and a woman.

Many in the front-lines of the gay rights movement prefer the slower, state-by-state approach to "resolving" the same-sex marriage issue.  They worry that the Supreme Court could hand their movement a serious setback by issuing a neutral or worse, an anti-gay, decision along the lines of the 1986 Bowers v Hartwick decision (upholding a Georgia sodomy law on the basis there was no constitutional protection for sexual privacy).  It took the high court 17-years to reverse the dubious Bowers decision in the seminal 2003 case of Lawrence v Texas, which expressly overruled their prior decision as defining the liberty and privacy interests of two consenting adults too narrowly to survive a Due Process analysis.

There is also a notion that gay-marriage was removed via the ballot box and that's where the battle should be won.  In our Democracy, however, core individual rights (once defined) are not subject to the ebb and flow of majority rule.

Other gays are tired of waiting, however, genuinely offended by the series of referendums passed which discriminate against their sexual orientation.  For example, California already has a progressive civil union statute to protect property rights and employment benefits.  But the Perry case is about much more than property rights and benefits; it is about individual liberty and the sacred right to chose one's life partner, one's spouse, without interference from the state.  Court watchers equate the Perry case to that of Brown v Board of Education (abolishing the "separate but equal" fallacy in public schools) and Loving v Virginia (holding that a state could not prohibit interracial marriages).

Whatever the outcome of the trial, an intermediate appeal to the Ninth Circuit is guaranteed to send this one to the United States Supreme Court.  Plaintiffs are represented by the unlikely but outstanding duo of Ted Olson and David Boies of Bush v Gore fame.  The former represented President Bush as Solicitor General; the latter represented former VP Al Gore in the famous case settling the 2000 presidential election.

Olson's conservative credentials have led some to wonder whether he is serving as a "double agent" planted to hand the movement a serious setback at the high court.  Something tells us that Olson should be taken at his word when he states that, separate is not equal and that a "civil union" is not the same as a marriage.  With 44-wins already before the high-court, Olson likes his chances at that level; he genuinely believes he's on the correct side of this issue.

In the meantime, the Perry case has already been to SCOTUS; Judge Walker's decision to televise the trial on YouTube was appealed from the other end of the state by Senator Dennis Hollingsworth, (R San Diego), the political clout behind the named defendants in the case.

The appeal stayed the trial judge's decision to stream the trial to the Internet and subject all of us to reading about the case, or suffering through a painful re-enactment of the trial.  Several key depositions (Paul Nathanson and Katherine Young) taken last fall, however, have been leaked to YouTube, and effectively convey the background surrounding what is shaping-up as our next great civil rights struggle.

5-votes will be required to establish precedent once a writ of certiorari is inevitably issued by the high-court in the case.  Olson and Boies will probably need to persuade Justice Anthony Kennedy, an oft-breaker of ties at the Court.

SCOTUS-watchers figure the so-called liberal bloc of Justices (Ruth Bader Ginnsburg, Sonia Sotomayor, Stephen Breyer, and John Paul Stevens) will vote to condemn Proposition 8 as unconstitutional on Equal Protection grounds.  Since Justice Stevens announced his retirement on Friday, effective at the close of this session of the Court in June, President Obama's second high-court nomination takes on critical importance in the Perry case.  Justice Stevens' replacement will most-likely be a confirmed sitting Justice by the time Perry is on the high-court's docket sometime in 2012; the "day-after-tomorrow" in Supreme Court-time.

Of note:  Perry is not the only "gay-rights" case percolating through the federal courts at the moment; also destined for certiorari is Gill v Office of Personnel Management.   That case presents a more narrow constitutional challenge to a specific provision of the Defense Against Marriage Act preventing same-sex couples from receiving benefits that other non-gay federal employees receive for their families.

Plaintiff's counsel in Gill, Mary Bonauto, prevailed in the Massachusetts case that legalized gay-marriage in that state.  While Bonauto acknowledges that her case is not the left-coast headline-generator that Perry is, she is mindful that both cases seek to expose the federal government's "double standard" when it comes to same-sex marriage; she notes the feds recognize a wide-variety of marriages once they are licensed by a state, except in the case of gay-marriages.  Bonauto and other legal professionals fear that Perry seeks too momentous and far-reaching relief; the decision, after all, could invalidate anti-gay-marriage laws in nearly 40-states.

Michigan Connection:  In addition to those of us who have a family member involved in a same-sex union (my brother) or who are themselves involved in such a union, the left-coast Perry case could invalidate the 2004 Marriage Amendment to Michigan's constitution.

Also, the Law Blogger (yours truly) will be admitted to the bar of the United States Supreme Court on the final day of this session, June 21st; Justice Stevens' final day of his long career on the high-court.

Stay tuned for the outcomes of these cases folks.  The Law Blogger will strive to keep you informed of significant developments.

May 2010 Update:  President Obama nominated Elena Kagan to replace retiring Justice Stevens; her nomination is expected to be confirmed over the summer.

April 2011 Update:  As predicted, this one is going to go all the way, taking prisoners along the way.  The first judge that had the case, now-retired Vaughn Walker, is coming under fire for showing portions of a hearing at a recent speech he gave.  Covered by the WSJ's Law Blog.

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Posted in: Dennis Hollingsworth,Jeff Zarillo,Kris Perry,Mary Bonauto,Paul Katami,same-sex marriage,Sandy Stier,Schwarzenegger,SCOTUS