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cfortunato, Attorney
Category: Bankruptcy Law
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Experience:  Bankruptcy professor.
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I bought some investment land in Durango, CO about 5 years

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I bought some investment land in Durango, CO about 5 years ago for $180K. I owe about $115K on it now but its probably only worth $90K. Right now, I'm paying about $18K annually in to this property for P&I, taxes, and association dues. I feel like its never going to end and I'll never see another dime of that money.

I'm debating a strategic default. I can afford the payment but just barely. I'm fearful that if I default, I'll end up ruining my credit AND I'll end up getting a deficiency judgment filed against me. Its a small bank. I doubt they are swimming in foreclosures like many banks. Is my fear founded? Is this a likely scenario? Can they file a 1099 and is that likely? Other than credit score, what should I be considering before do this?? I'm mostly afraid of letting it go and ending up with a judgment against me. Double wammy.
Submitted: 6 years ago.
Category: Bankruptcy Law
Expert:  cfortunato replied 6 years ago.

Hi JACustomer,

If you default in this mortgage, the lender can get a deficiency judgment for the balance of the loan after the property is sold at foreclosure. This judgment can be used to garnish wages and bank accounts, and to place liens on other property (house, car, etc.). If the lender gets a deficiency judgment, there is no 1099-C issued (because the debt was not forgiven).

If the lender did issue a 1099-C, you would have to include the forgiven debt as taxable income only to the extent that you were solvent at the time of the sale. (Solvent means total assets - including the value of the property - were greater than total debts - including the mortgage.

You may be able to file a Bankruptcy to eliminate both possibilities.



I think this is what you wanted to know. If not, please let me know.
Thank you!




Customer: replied 6 years ago.

Kinda what I wanted to know. I guess the debate is whether the bank pursuing a deficiency judgment is likely going to really pursue. My wife says she's heard with amounts as small as ours ($30K deficiency), no way will they come after us. My worst nightmare is walking way, taking the credit hit, AND having the deficiency judgment bite us in the butt. If that's almost a certainty, I'd rather just fire sale the land right now, finance the deficiency with a 401K loan, and move on w/o killing the credit.


Correct me if I'm wrong, but I don't think bankrupsy is an option fo me. I have a decent house, good income, cars, not a lot of other debt. But, the $1500/month for this property puts me and my wife down in the catagory of not having much at all left over each month and we have 4 kids will college coming up, etc.


I know you don't have a crystal ball, but if I thought the chances of Colorado pursuing me for the deficiency was extremely small, I might consider risking it. I have a $4200 tax bill due shortly and if I'm walking away, I'm just going to ignore it and start not paying the note.



Expert:  cfortunato replied 6 years ago.

If the bank does not think it worthwhile pursuing a judgment for $30K, they can - and probably will - sell the right to pursue the judgment to a collection agency. Once they finish adding late fees, interest, and legal fees, the amount owed will be closer to $40K, and this is the amount the collection agency will be able to collect.




Customer: replied 6 years ago.

Whats the diff between ignoring collections and ignoring the bank? I know a deficiency judgment gives them rights to garnish wages, etc. Can the collection agency do that as well?? Thanks for being patient.

Expert:  cfortunato replied 6 years ago.
Yes - judgments work the same, whether obtained by a collection agency or by a bank.
cfortunato and other Bankruptcy Law Specialists are ready to help you
Customer: replied 6 years ago.
So defaulting in a state that allows deficiency judgments basically is a horribly risky idea unless I'm willing to pursue bankrupsy. Fire sale and finance the debt is likely a better outcome for me. Am I correct that this would be your opinion??
Expert:  cfortunato replied 6 years ago.

If Bankruptcy is not feasible, I cannot give you my opinion regarding the best course for you, as doing so would be too close to providing legal advice, which we are not allowed to do. (We are only allowed to provide legal information.)

I do think, though, that you should consider the possibility that the value of you land will go back up eventually.


Customer: replied 6 years ago.
But its safe to say it is very likely I could end up with a credit rating hit AND end up having to pay the deficiency if I go the route of a strategic default? Promise I'm about done.
Expert:  cfortunato replied 6 years ago.

You will get a credit hit, and will likely get a deficiency judgment if you default.

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