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What is a Strategic Default?

Posted on in Bankruptcy
What is a Strategic Default?

At first, the term “strategic default” might sound like an oxymoron. You know that defaulting on your loan is a bad thing. Or at least, you have been taught to believe it is a bad thing. But sometimes, it actually makes financial sense to default on your loan.

The first question to ask yourself when you are considering a strategic default is whether the value of your property is higher or lower than the amount of money you owe on your loan. If the property is worth less than you owe, you have what is known as “negative equity.” Having negative equity does not necessarily mean that a strategic default is your best option, but it can.

Why Should I Choose a Strategic Default?

Strategic defaults are also sometimes known as voluntary foreclosures. This is because despite having enough money to pay off your loan, you choose to allow your property to go into foreclosure.

An example of a scenario where a strategic default can be beneficial is this: An individual has two houses - a permanent home and a vacation house. Both have current mortgages. The vacation house is only worth $200,000, but the owner has a $300,000 mortgage on it. It might be years before the owner sees equity in the vacation house and if he or she sells it right now, the owner will lose money. Opting to default on the vacation house's mortgage would cut that expense for the owner, giving him or her the chance to re-allocate those funds toward the main home's mortgage.

Know When a Strategic Default is the Right Choice

There are many reasons why a strategic default might not be the best choice for you. These reasons mainly have to do with what comes after your default – where you will live and how you will pay for it. If you are considering a strategic default, consider the following points:

  • Having a strategic default on your credit record can hurt your chance of renting a house or apartment. This is because landlords can review your credit history and decide whether or not to rent to you based on the information contained within.
  • You will not be able to get a Fannie Mae-backed mortgage loan for seven years after your default.
  • Your credit score will suffer.
  • You could be liable for a deficiency judgment, which means that your lender could possibly seek a personal judgment against you to obtain the money you owe on the loan.

An experienced bankruptcy attorney can help you get a better handle on whether a strategic default is right for you.

Illinois Bankruptcy Attorneys

It might be difficult for you to morally reconcile the prospect of simply walking out on your mortgage loan. Understand that thousands of people strategically default every year and depending on your circumstances, it could be a sound financial move for you. To learn more about strategic defaults and related topics, contact the Law Offices of Newland & Newland, LLP to schedule your initial legal consultation with our firm.

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