You are correct---the majority of counties don't automatically forgive the loan---except in exceptional circumstances.
Neither the babies, nor the job losses, nor the housing market slump are extraordinary occurrences. A majority of Americans are presently struggling in this economy. The fact that Obama may think that we can afford to give money away, simply does not represent the thinking of the majority of folks running the states and local governments.
I understand that you feel the county should simply walk away from the money---but that can not be expected in this instance. Why should the county, in this instance, take the loss for the housing market drop---as opposed to the borrowers who stood to gain when they took the loan in the first place?
The law does not allow for your daughters to demand that the county simply give the money that they were loaned---it isn't going to happen like that.
They can try to short sell the properties--but the county can prevent that if the county is the one who loses in the end---and you can expect problems in that regard as the properties are under water.
The more realistic approach is for them to allow foreclosure
. After the foreclosure is completed, the lender will auction the house. The lender can do one of a couple of things then.
The lender can seek a court judgment against them for the difference between the loan amount and the amount of sale at auction (deficiency). With the judgment, they can attempt to collect money from them; they can garnish their wages or levy on their bank accounts.
The lender, however, often will not bother to do this though because the collection rate on deficiency judgments are usually not very good --in fact statistically, the collection rates are dismal.
The lender may instead choose, and often does choose, to write the debt off for tax purposes. If they do that, they will send them a 1099 tax form and the loss the lender took (the difference between the loan amount and the amount of sale at auction), will be attributed to them as income and the IRS will expect them to pay income taxes on that amount. HOWEVER, if they can show that they were insolvent at the time of the foreclosure---that their debts, including the house, exceeded their assets, then the IRS will not force them to pay any taxes on the amount that the lender writes off.
If they were not fully insolvent at the time of the foreclosure---as an example they had $10,000 more in assets than in debts (and retirement accounts do not count), then while the lender may 1099 them for $100,000, they would only have to pay taxes on the amount that they were above the insolvent level----they would pay income taxes on just $10,000.00.
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