Hello everyone. I used to be on the board a decent amount of the time until Katrina destoyed everything I owned. I have a serious question I need help with. My mortgage company has told me that they have written off the loan but on good terms. They said that it was a business decision on their end and that there was to be no adverse affect on me. When I asked what I would do in order to pay the loan back (I had no flood insurance) they basically told me that I could just send in whatever I could whenever I could. Is the loan for all intents and purposes gone? Can they write it off (for tax purposes I assume) but then still collect on it? I need some help here! Thanks!
That is the reality of a regional disaster. You can't squeeze blood from a stone, and the only goodwill out of their losses will be from aiding reconstruction and recovery. Whether enlightened business or just accepting reality, its entirely rational as long as they are diversified enough to recover themselves. The sooner they wash their own losses off their books the sooner they recover, too. Could they later sell or collect on the debt? Probably, but it would be a public relations fiasco that would likely cost more than they might collect. There might be some advantage in reaching a final settlement on the loan, in a manner that cancels possible debt forgiveness "income" with your very real losses for tax purposes, particularly if there is no practical way you would be able to pay off any significant part of the loan. You would like to be able to move on with your life without the burden of either huge debt, or a bankruptcy, if you can. You might want to review this with a CPA before approaching the lender.
I was wondering if I should approach them to possibly neogiate a payoff for the deed to my house if they've washed their hands of it. I am just confused as to the legalities of what they have done.
Lenders write off debt when they have little or no prospects of repayment. They do it so that their books correctly reflect their profits and the value of their assets, which they are obligated to report accurately to their shareholders, and they do it so that they do not pay taxes on income they don't have and have little chance of recovering. They have a second decision on whether after writing off the debt, they still hang on to it, or they sell it off. They may also settle for less than full payment, in effect forgiving part of the loan that may be unrecoverable, particularly when the property securing the loan is worth less than the remaining balance, and the borrower does not have sufficient other assets to cover the difference. This often happened, for example, during the early '90s real estate downturn in some areas. It is my understanding that the forgiven part then counts as taxable income to the borrower, but only to the extent the borrower has remaining net worth, but you better do your homework before proceeding. You should go over your situation with a tax professional such as a CPA or enrolled agent, however, to make sure you know what you need to negotiate with the lender to put this behind you permanently, both with respect to the mortgage, the tax consequences of the loss of your home, as well as the tax liabilities. Technically, you are probably insolvent, since your liabilities probably exceed your assets, and your income probably makes little change to this, but if you can settle your debts instead of going thru bankruptcy, you might recover financially faster from any damage to your credit.
Thanks for the help. Bankruptcy is not something I am even considering....we're hanging tough on the bills, mostly because we aren't having to pay the mortgage right now. I just find it kind of sad that they are going to leave the thing in limbo like this. I never asked them to do this and they never even bothered coming to me to ask me when I might be able to start making payments again, they just did this. Now I am not sure what to think. I almost feel like the house isn't mine anymore and that they can just decide whatever whenever. Of course, I understand they hold all the cards, it's just an awkward situation the likes of which I never hoped to face. I am trying to get the house back together so that's it's worth something to both them and me, but it's hard to invest in it when they won't come straight with what they want to do. They seem like they want to wash their hands of me (they told me they wouldn't service my loan anymore) but they get to keep their options open. Sure wish things worked like that for us. You know get a credit card, charge it up, tell them that you can't pay, wash your hands of it, but keep your options open to pay them later. Sounds good to me!
Keeping their options open might be their best choice at this point. You have nowhere to go but up, and as you recover, so does your ability to pay off some part of the debt.
