So-called “strategic default” has become a common response by homeowners who saw the value of their mortgage crash in the Great Recession, and now years later, are still deeply underwater. Many homeowners are ready to move on to their second home, or move into retirement, and are instead trapped in a debt obligation that far exceeds the value of the home.
It’s a tough situation, and many homeowners have decided that the most reasonable response is to walk away. There are several ways to do this. In New York, many homeowners who’ve struggled with payments stop paying but remain in the house, knowing that the foreclosure process can drag on for months or years. Others purchase or rent a new home, move, and simply stop paying for a property, allowing foreclosure to run its course.
There are downsides to this. First, the mortgage lender may pursue a deficiency judgment against you, billing you for the difference between the ultimate sale price of the home and the remainder of your debt. Bankruptcy can clear deficiency judgments, at further cost to your credit score.
Second, there is the risk of a substantial tax liability. Congress passed the Mortgage Forgiveness Debt Relief Act in 2007, which clarified that the difference between the value of the property at the time of foreclosure and the amount of the loan – which is usually treated as income by the IRS – could not be subject to federal income tax.
Unfortunately, that law expired in 2012, which means that if you walk away, you may incur a significant tax liability.
Is a strategic default right for you? Maybe so, but you should protect yourself by talking through your options with the bankruptcy and mortgage relief attorneys at Zelenitz, Shapiro & D’Agostino.
Call us today at 718-599-1111 and talk to an experienced Queens attorney for free.