Reader Mailbag: National Novel Writing Month

What’s inside? Here are the questions answered in today’s reader mailbag, boiled down to five word summaries. Click on the number to jump straight down to the question.
1. Living on less
2. Retirement or debt?
3. Strategic foreclosure
4. Help partner or yourself?
5. Which retirement plan?
6. Paying student loans early
7. Exceptional Microsoft Office deal
8. Estimating costs after dependent leaves
9. Debt payment and marriage
10. Stale checks

In November, I’m going to participate in National Novel Writing Month, which is basically an initiative to encourage writers to buckle down and get a rough draft of a novel of minimum 50,000 words finished before the end of the month. You’re allowed to develop outlines and other such materials earlier, but you’re supposed to write the entire novel within the given month.

I’ve already signed up and you can follow the novel as I write it. I’ve already got some outlines and character notes.

It might be good. It might be awful. I’ll let you know how it’s going when I get started, so you can read it if you’d like.

Q1: Living on less
I am 35, a single mom of one child (7 y/o girl). I live in southern Georgia. I have what I consider to be a great job which I love. I am fortunate enough to get signifacate yearly wage increases. In 2 years with this company I have went from $18,000.00 to $31,000.00. However it never seems to be enough to pay off credit cards etc. I got to the point where I have taken out a title loan on my car to help pay bills. Yes, I’m still paying on the stupid title loan. I have made some poor choices with lack of guidence. I feel like I walk around with this huge rain cloud over me and the bottom is going to fall out at any time. I have no savings, no emegency fund. My question is..Can I live off of only $1000.00 a month? Is it realistic? Do you have/know of any resources or articles to guide me in the right direction? Any guidence would be greatly appreciated.

- Stacy

You can, but you’re helped greatly by your location. You’re living in southern Georgia, which, frankly, has very solid cost-of-living numbers. I don’t know exactly where you live, but I do know that compared to many other areas, your cost for housing and many other items is very strong.

For the short term – and always keep in mind that this is all about the short term – you’re going to have to make some painful cuts. Look for the lowest-cost housing you can, even if it’s tiny. If you live in a smaller Georgia town, look for someone who is renting out a room or two in their home and see if you can live there for a while, perhaps with rent lowered or eliminated in exchange for some household help. Housing is likely one of your biggest costs, so minimize it as much as you can. Ask around – a great place to start is by getting involved at a local church, because at the local level, they do a very good job in terms of social help.

From there, move on to eliminating every dime of your debt that you can. Get an emergency fund of $1,000 or so in the bank, then focus hard on getting rid of that title loan.

You’re going to have a plate full in front of you, but keep in mind you’re living lean now so that you don’t have a scary existence later on. You’re making sacrifices now to build a great foundation for five years down the road.

Q2: Retirement or debt?
I am a 25 year old young professional getting ready to transition into my second job within the next 6 months. I have $4,795.43 in credit card debt and $53,999.83 in student loans (I just consolidated 2 federal loans which will take 2 payments totaling $308.51 down to a payment of roughly $180.00 and then I have an additional loan payment of roughly $180.00

I also contribute 10% to my retirement (Company policy is that I don’t need to contribute any to achieve the company 8% contribution). Finally, I have roughly $3,500 in an Emergency Fund (which even as a single person doesn’t make me comfortable enough). So my question is: should I stop contributing to retirement and direct that money to paying down my credit card and then student loan debt?

I struggle with what to do because I know the more I put into retirement (with the market still down right now) and the earlier I do it the better I will be in the long run.
- Jarrett

Don’t worry about the market timing. You might invest today and the stock market stays level for seven years or drops 20%. You can’t predict the future, so don’t worry about it and be aware that much of your gains will come in the form of dividends, not growing stock price.

Given that debt load, I wouldn’t cut retirement savings. Instead, I would focus on paying down the higher interest debt first (probably that credit card). Your debt isn’t big enough to be strangling you.

Remember, though, the faster you can get the cards paid off, the better off you are, especially if you don’t touch your retirement savings.

Q3: Strategic foreclosure
My husband and I bought a condo at the peak of the market in Los Angeles for $452,000. It is currently worth about $350K and several units in our building are foreclosing and will drop that price even further. While we can afford the payments, we do not want to live in it forever; it is too small for our growing family. We cannot rent it out for nearly what our monthly mortgage payment is. We have spoken to the bank several times but they will not work with us to refinance because we owe more than what the condo is worth. We could sink a huge amount of our savings into the condo and probably refinance. But then we would lose almost all of our savings and still be stuck with renting the place. We are contemplating foreclosure, trashing our credit and renting for the next 5-7 years before looking to buy another home. What are your thoughts on “strategic foreclosure?” We have two very stable incomes and enough money in savings that we can afford to buy everything else we need, including bigger purchases such as cars, with cash.

- Ansley

Strategic foreclosure is something I go back and forth on. On one hand, you’ve made an agreement with another entity and are obligated to maintain it.

On the other hand, though, I’ve read a number of books about how mortgage companies and large banks behaved during the housing crisis and to describe some of the behavior as unethical almost feels like an understatement. Many groups had a great deal of insider knowledge about the reality of the housing situation and they knew they were issuing negligent loans. They were utterly failing to do any form of due diligence on the loans and were using insider knowledge to pawn off some awful arrangements on potential homeowners.

Given all of that, I completely understand the case for why people would walk away from their mortgages.

Now, does it make financial sense? What is your game plan for after the foreclosure? How does that directly compare to the situation if you chose not to walk away? If I were you, I’d run the numbers on both scenarios in detail, recognizing that your various forms of insurance will probably go up if you do walk away. Make sure to look at scenarios where one or both of you lose a job, too.

I don’t have enough of your financial picture to say which side is better. Good luck.

Q4: Help partner or yourself?
My soon to be fiancé and I recently started living together. We live in a very expensive part of the country in a small apartment. He is currently in grad school. It is an expensive program, and he has some student loans to cover tuition and living expenses. We did Financial Peace University after he had accepted the loans. Neither of us have any consumer debt. We have budgeted so that he is spending way less than the loan money he has been given (about $4000 less each term, so about $12 K less each year of a two year program), and I am spending less than I earn as well. The extra money from his loans is sitting in his bank account, and he will use it to immediately start paying down the loans after graduation. I currently work full-time at a stable job, making about $46K. We currently split the expenses down the middle—me paying for my half with my paycheck, him paying for his half with his loan money. I am currently putting about $1000 into my savings each month. He has about 20K saved in his savings from before grad school, not including the student loan money. I have about $15K in my emergency fund and feel comfortable with that number. My questions: Would it be better for me to pay for all of our joint living expenses for the remainder of his degree, so that he can use less of his loan money, or is it more important that I continue to save that $1000 per month? What would be the best way for us to jointly manage our money and the loans? For whatever reason, it seems like a really confusing decision for us.

- Midge

It comes down to this: are you guys going to be together over the long haul? Is marriage really going to happen?

At some point – and that point varies a lot – you’re going to need to effectively merge your finances on some level, because you’ll be operating as one entity, sharing housing and electricity and water and meals without borders. Any debt that either one of you has will affect you both.

When does this transition occur? That’s very much a matter of your relationship with him. You might feel it’s the right time to do it now. On the other hand, I see nothing wrong with hedging your bets and continuing to save until your wedding, then at that time using a big chunk of your savings to wipe out a lot of his loans at once. This way, if you don’t make it to the wedding, then you still have the money you’ve saved.

Q5: Which retirement plan?
I work for the University of California and I have to say, the benefits are none too shabby. Aside from the medical benefits, I’m already taking advantage of the 401k contributions, (and I’ve set up a separate Roth IRA with Vanguard) but I just discovered that there are a bunch more retirement account options that I’ve never heard of. 403b, 457B, DCP? I’m lost, and the material I’ve found online is a little over my head. What are these plans, and how do I know if they’re right for me?

Maybe I’m getting a little bit ahead of myself…I’m 24 and I have a good chunk of debt from student loans. I’ve set myself on a course to pay off the entire $23k by the time I’m 30, while still allowing for contributions to my 401k and Roth IRA plans in between. Since I only make $30k per year and I’m nowhere near maxing out my 401k and Roth IRA contributions, would opening more retirement accounts even be a wise decision, or should I just focus on what I’ve got right now?
- Lauren

The number of retirement options can be confusing. I’ll try to simplify your options as concisely as I can.

A 403(b) is pretty much identical to a 401(k). A 457(b) is almost the same as the other two, except you can make early withdrawals without the 10% penalty, but you’re also not able to open up a Roth IRA. A DCP is a deferred compensation plan, where you agree to have some of your salary paid to you at a later date by your employer (usually with cost-of-living increases added in).

I wouldn’t really worry too much about the tons of options available to you. Just keep putting money into your 401(k) and Roth IRA as you have been. The only reason you might want to consider changing your 401(k) plan is if you discover that the specific investment choices are better with the 403(b) or 457 offerings. I would skip out on deferred compensation unless you’re making a lot of money and can afford to basically say “pay me 50% of my salary now and 50% in 15 years.” That’s a good deal for some but not so good for a younger person with a starting salary.

Q6: Paying student loans early
I’ve done some searching about my situation and I came across a problem you figured out about a guy with who had three loans to be paid off with three different interest rates. I tried to translate it to my loan situation but I couldn’t figure it out. Which leads me to emailing you and it would mean a lot of you could help me figure this problem out. Here goes:
Loan #1: $16,732.17 Interest Rate: 5.0 Minimum Payment: $122.67 Paid off in: 16yrs,11mths
Loan #2: $62,573.15 Interest Rate: 3.25 Minimum Payment: $302.18 Paid off in: 25yrs,5mths

I’ve been paying $500.00 towards Loan #2 and $122.67 towards Loan #1. With that being said this is what my Loan #2 looks like.
Loan #2: $62.573.15 Interest Rate: 3.25 Monthly Payment: $500 Paid off in: 12yrs,10mths

My question is what would be the most beneficial to my current situation as far as dividing up the extra $197.82 I put towards loan #2? Do I put the extra month towards the smaller loan amount or continue paying as I am? Also, how do I calculate what my outstanding principle will be years into my loan after making minimum or putting extra towards the payments?
- Bob

I would put that entire $197.82 – let’s just round it to $200 – towards loan #1 and make minimum payments on loan #2.

There are two reasons for this. One, the first loan has a higher interest rate, which means that for every dollar in that loan, it’s directly costing you more to leave it unpaid. Second, the first loan has a lower balance, which means that with extra payments, you’ll eliminate the loan faster than you would eliminate the second one with an identical extra payment.

If you can knock out the higher interest loan faster than you can a lower interest loan, always knock out the high interest loan first. You win in terms of both cash flow and overall interest paid.

Q7: Exceptional Microsoft Office deal

Did you ever hear of this offer? My wife’s company sent this around indicating we could purchase the complete MS Office suite to use at home for only $9.95.

http://marketing.microsofthup.com/FlyerPreview.aspx?id=++++++++16

Is this a scam?
- Jeff

It’s not a scam at all, just some smart business by Microsoft.

For some companies that buy Microsoft Office for their business, Microsoft throws in a sweetener – deeply discounted copies of Office for the employees of those companies for personal use. I know of at least two people who are in similar situations.

It works pretty much as that page describes. If you have a valid email address for the company and the correct passcode, you can log in to download the deeply discounted copy of Office you’re entitled to as a work perk.

In other words, it’s a great offer, but it’s heavily restricted as to who can use it. Yet another reason why it’s worthwhile to check out your benefits at work.

Q8: Estimating costs after dependent leaves
My daughter is in her first year of college. She is attending out-of-state because she and my husband were convinced that none of the in-state schools that accepted her would meet her educational needs. She has a car which she needs for work because she can’t get a job on campus because they are all need-based and her parents have too much income. From what we can tell, she does get some discount on her car insurance because she is on our policy, but she is also penalized because her father has a fairly new and expensive car. She is also on our health insurance policy. We are trying to find out if it makes financial sense for her to live off campus so she can declare herself independent from us and next year qualify for need-based scholarships and jobs, but we can’t get a straight answer on any of the numbers in order to determine what course she should follow. Are there any sources you know of which would enable us to estimate her costs if she were no longer our dependent?

- Lisa

The best source you have is your college’s financial aid office. This is pretty much the reason why such offices exist – to help people get such affairs in order.

The office will have a much greater insight than I do as to her eligibility for jobs and additional scholarships and grants when she’s independent versus dependent.

My speculation is that there will be a benefit overall for her financially, but it might not be as big as you think and it might be subsumed by the tax benefits you get with her as a dependent.

Q9: Debt payment and marriage
My boyfriend and I are both 23 and we’re trying to pay off our debts in the hopes that in a year or two we can get married. We feel we want to enter into such a large commitment without any extra stress. I have about $1300 in credit card debt and he has about $10,000 in auto loan debt (that he is aggressively paying off). Neither of us has an emergency fund since all of our extra money goes towards these debts. I only make about $700 a month and with the combination of paying my bills and paying $200 towards my credit card, I don’t have much left over (and what I do have left goes to my credit card). What more do you think we could do to aid our path to a debt-free life together? Should we both begin an emergency fund now, along with both of us making aggressive payments towards our debts?

- Rhiannon

I think you’re doing the best thing you guys can possibly do to make sure your relationship off on a financially firm foundation.

If you have no emergency fund at all, I would encourage you to save up $1,000 for such a fund, perhaps a shared one for the both of you. This will help create a buffer against the unforeseen and allows you to be independent of the whims of the credit card industry when you need that money for an emergency.

Aside from that, you’re doing great. I strongly commend you for getting things started in such a sensible fashion.

Q10: Stale checks
We have stumbled across a financial issue that is tough for us to answer both legally and ethically. We were contacted by our previous landlord today who said that he found a check yesterday (9/27/10) from us, dated October 2009, that he forgot to deposit. We switched banks this summer, so even if the bank would have cashed it, that account is now closed. It’s only for parking ($50), but still, not something that we are eager to pay since we are paying down our debt snowball, and really have a use for every dollar.

As a little background info, the couple we rented from were constantly clueless when it came to finances – they had to ask us what our security deposit had been when we moved out, as they didn’t remember. They returned everything to us, and then later asked for our check copies to prove what we had paid them. We are a little tired of having to deal with them because of their own financial mismanagement, especially considering that we were extremely good tenants, usually paying the rent weeks in advance of when it was due, and leaving the apartment in excellent condition.

Are we now obligated to issue them a new check, or is it their loss for being irresponsible?
- Shannon

I don’t think you are obligated to do so.

According to the Uniform Commercial Code, a check is outdated after six months and a bank does not have to accept it. I think the same thing would reasonably apply here – the bank probably wouldn’t accept that old check, and that’s their negligence, not yours.

I would politely tell them that you issued them payment when they needed it, the check is now stale and invalid as per the banking policy stated above, and that you’re currently in a strapped financial position. That should be the end of the subject.

Got any questions? Email them to me or leave them in the comments and I’ll attempt to answer them in a future mailbag. However, I do receive hundreds of questions per week, so I may not necessarily be able to answer yours.

If you enjoyed reading this, sign up for free updates!

Loading Disqus Comments ...
Loading Facebook Comments ...

92 thoughts on “Reader Mailbag: National Novel Writing Month

  1. Kevin says:

    Wow.

    I’ve gotta say, I’m a little shocked at some of your answers, Trent.

    From the two-wrongs-make-a-right answer you gave to the “strategic defaulters,” to the you-snooze-you-lose answer to the parking question, it seems your morals have become a lot more flexible lately.

    The condo owners signed an agreement, and now its inconvenient. Too bad.

    The stale-check folks received a benefit they never paid for. They should pay for it.

  2. brad says:

    usually with the HUP the 9.95 version is download only, with no hardcopy. so if you have to purge your laptop/desktop, you will have to revisit the download link (from your saved email) and dload/install again. for an extra 9.95/10 you can add a backup dvd so you dont have to rely on an internet connection/archived email to preserve your investment.

  3. valleycat1 says:

    Q1 – I don’t quite understand why you are trying to live on only $1K/month, if your income is $31K. So maybe I’m missing something here. However, Trent’s right (except maybe about renting a room, since you have a small child) – you need to come up with a short-term plan to get the debt off your back & an emergency fund built up. And quit charging to your CC.

    When I was in a similar situation, I had to phase out the CC use instead of just going cold turkey, because I was using it when I had more month than money. I just became much more aware when I used the CC, eventually setting myself a repayable limit for the month. It can take a couple of months to get expenses down to where you’re covering them all with cash, and working out where you can make the budget cuts, when you’re used to pulling out the CC . But eventually you’ll be living within your means so you can use cash instead of the CCs. Those first few months can be very painful, but it’s well worth the effort. Good luck, & good for you for tackling this early on!

  4. Raghu Bilhana says:

    This is my response to question 10.

    Even though the house owner forgot to cash that check, the right thing to do in this case would be to write another check for the $50 amount to the previous house owner.

    You are not obligated by any law to pay it back, but it is the right thing to do.

    Pay it back, your debt would not become any less if just wrote a check for $50 for that poor guy.

    Mistakes happen by anybody, in this case your landlord might have forgotten to encash it.

  5. DivaJean says:

    I was the beneficiary of a stale check problem. I had paid half of the cost of my siding for my house up front with a check– and THAT check was never cashed. It was over a year ago and I have since switched banks.

  6. Johanna says:

    @Ansley: I don’t think strategic default is immoral. You’re breaking a contract, but you’re also accepting the agreed-upon consequences of breaking that contract. You’re not doing anything sneaky or dishonest, especially if you have a non-recourse loan (which, since you’re in California, there’s a good chance you do), where the lender cannot come after you for the balance.

    You’re far enough underwater that strategic default probably makes sense. And since you’re in a condo building where a lot of other units are getting foreclosed on (which will drive up your share of the maintenance costs), that makes the cost of staying even higher. Still, this is a big deal, so it’s probably worth talking to a lawyer before you do anything drastic.

  7. Shaun says:

    I can’t believe some of the responses that come up when people talk about “strategic foreclosure”. This is a perfectly viable solution for some. The agreement you signed with the bank (or other financial institution) basically says 2 things:

    1) You will pay a specified amount for a specified time then you will own this home.

    2) If for any reason you do not pay that amount for that length of time, we have the option of taking that home from you and trashing your credit.

    You are perfectly fine stopping payment and letting the bank take the home. The risk of you doing this his already been taken into account by the banks, that’s why they included it in the mortgage.

    Whether or not is a good financial decision is another story, one that needs to be looked at on a case by case basis. But nothing about letting your home be foreclosed upon is wrong or immoral. It’s a perfectly fine choice that’s already been included in your contract!

  8. Shannon says:

    There is absolutely NOTHING wrong with a strategic foreclosure. Like many others have mentioned the mortgage is simply a contract you sign with the bank and nothing more. You break the contract, you suffer the penalties set out in the contract. There is no “moral” element to this contract which requires you to honor it.

  9. Monica says:

    Regarding the $50 parking check – they received a benefit they DID pay for. It’s not their fault the scatterbrained owners didn’t cash it. Would the nice thing be to say we all make mistakes and write a new check? Yes. Do I think they are completely wrong if they don’t do that? No.

    Trent is spot-on regarding the behavior of some of the banks and mortgage companies recently. (Does not mean I agree or disagree with the condo people. Not sure how I feel about that.)

    Just saying – some of the banks and mortgage companies deserve what is happening to them. Yes, many people should have done (much) more homework before accepting a loan. But the banks should have also done more homework. Both sides in many cases were greedy and now it’s biting everyone in the rear end.

  10. Michelle says:

    @Lisa – just moving off campus WILL NOT, I repeat, WILL NOT, make her an independent student, and if she tells you that, she has not spoken to anyone at her financial aid office. On the FAFSA there are 7 questions, and they are…

    1. Are you 24 year of age or older?
    2. Are you married?
    3. Are you enrolled in a master or doctorate program?
    4. Do you have children who receive more than half of their support form you?
    5. Do you have dependents other than your children or spouse who live with you?
    6. Are you an orphan or ward of the state?
    7. Are you a veteran of the U.S. armed forces?

    She can’t answer “yes” to at least one of those questions, then there is not much you can do to make her an independent student. Call her financial aid office, they won’t be able to talk about her aid specifically, but if you ask a general question, ie: how can my daughter become an independent student?, they will tell you the same thing I’ve just said.

  11. Gimena says:

    In response to Question 8:

    If your daughter lives on campus vs off campus will not make a difference in her ability to declare independence.
    I had this same problem when I went to college. Indenpendence is very difficult to prove. For example in Illinois, where I went to school, a student has to prove the ability to pay half of all of their living and education costs WITHOUT scholarships or loans. Those costs include housing, transportation, out of state tuition, health insurance, car insurance, books, etc. For me I had to prove that I was earning $15k a year, ten years ago. There was no way I was earning that much, even with two part time jobs. If I would have been able to meet the income requirement, I then had to prove did not receive any assistance from my parents. Assistance includes health insurance and car insurance.
    After being independent for one year, I could apply to get in-state tuition. This required having the following documents: drivers license, library card, state income tax return, license plate, parking permit, bills, etc.
    I agree with Trent, the best source of information is the school. I got my information from the Admissions and Accounts Payable departments as the financial aid office does not deal with residency issues. Good luck.

  12. Interested Reader says:

    Michelle beat me to my post.

    The rules are pretty strict about how someone is considered indpendent. At least they have been in the past. I had a cousin who got married right out of high school in order to be able to get need based financial assistance at an out of state school (for both she and her boyfriend). They’d been dating all through high school and planned to get married after a few years in college but changed due to financial aid.

    I knew someone else who worked full time and was taking 1 class a semseter waiting until she turned 24 and could go to school full time on needs based help. She’d had a falling out with her parents and they refused to support her or turn over any financial information for financial aid.

    It didn’t matter that she got on financial support from her family, she couldn’t answer yes to any of those questions and didn’t qualify for aid.

  13. Sheila says:

    Regarding Q3, I’m not familiar with foreclosure, but would the bank be able to get a judgment for the unpaid amount? Also, would trashed credit make it hard to rent an apartment, increase auto insurance, etc.?

    Q10: I go back and forth on this because ethically, I think that you owe them the $50. Legally, you don’t.

  14. Kevin says:

    You guys are insane. Strategic defaults ARE immoral. You claim that it’s just fine, because it’s written into the contract. “Fail to pay, we take back the house and trash your credit.”

    But your “credit” is nothing more than documentation of how trustworthy you are. So you’re saying it’s just fine to break your contract, because all that will happen is the bank will tell everyone how untrustworthy you are. And somehow, you don’t think there’s any problem with that?

  15. Alice says:

    I also work at the University of California, and I can tell you that your answer to Lauren’s question is likely wrong. “DCP” in the context of UC refers to “defined contribution plan”, not “deferred compensation plan”. This was an amount that was taken out of employee’s checks (something like 2% – $19 at my pay grade, which was similar to hers). This just changed in May 2010, though, because the university restarted employee contributions to the retirement plan (UCRP). Now we contribute the same amount, but instead of going into an account that supplements our pensions, it goes into the retirement fund as a whole.

    If you leave the university, you can withdraw those contributions to the DCP or to the current RP, but you’d have to buy back your service time if you ever returned.

    Basically, DCP is not an option anymore at all. Trent, if you google “university of california dcp”, the answer is right there.

  16. Johanna says:

    @Kevin (#14): No, I don’t. And calling me names is not going to convince me that there is.

  17. Kevin says:

    Johanna:

    There’s a difference between what’s legal and what’s “right.”

    Strategic defaults are certainly legal, but I can’t comprehend in what world you think it’s perfectly ethical to commit an act that causes another entity (the bank) to declare to the world that you’re an untrustworthy deadbeat.

    The moral and ethical answer to dilemmas like this are easily reached by simply asking yourself, “what would Jesus do?” Or, if you’re not religious (and I’m not, but I can certainly recognize the moral ideal represented by a character like Jesus), “what would my grandmother think of my behaviour?”

  18. Jonathan says:

    “You are perfectly fine stopping payment and letting the bank take the home. The risk of you doing this his already been taken into account by the banks, that’s why they included it in the mortgage.”

    So, even if you have a great credit rating, the interest rate on your mortgage is going to be higher because the banks have to account for the people who consider “Strategic Default” a viable option to get out of an inconvenient situation.

  19. Johanna says:

    @Kevin:

    “Strategic defaults are certainly legal, but I can’t comprehend in what world you think it’s perfectly ethical to commit an act that causes another entity (the bank) to declare to the world that you’re an untrustworthy deadbeat.”

    What FICO score corresponds to “untrustworthy deadbeat”? I think I’m pretty well read on credit reports and credit scores, and I’ve never seen those words (or any similarly morally charged ones) anywhere.

    “Or, if you’re not religious (and I’m not, but I can certainly recognize the moral ideal represented by a character like Jesus), “what would my grandmother think of my behaviour?””

    Both my grandmothers were judgemental bigots. (One was appalled that I was friends with some Jewish kids. The other was horrified that I was learning Japanese.) I loved them both dearly in spite of that, but I would never in a million years substitute their judgement for my own. Thanks for the suggestion, though.

  20. Tyler says:

    Re: Mortgage Defaults

    Think about the flipside of the situation: if it is unethical for the person to walk out on the agreement to pay back the mortgage towards the purchase of the home, is it ALSO unethical that a person buys a foreclosed home at a lower value than they otherwise would, knowing they are profiting off the failure/bad luck/expense of someone else (either the evicted home owner or the bank holding the strategic defaulted home)?

    Q8: Yeah, you are basically out of luck. Best case scenario would be looking at getting your daughter listed as an in-state resident, but many schools require a student to be enrolled less than half-time for a consecutive year, which would leave her a year behind in her academic program.

  21. Gal @ Equally Happy says:

    Yes, the banks do consider defaults as an option in their pricing. And yes, if they fail to calculate that properly, that’s their problem, not yours. The homeowners made a contract. Breaking that contract comes with consequences (lower credit score). There’s no moral obligation here, only a contractual one. Please don’t impose your morality on other people.

    Also, credit score does not show how “trustworthy” you are, only how good you are at certain financial management skills. Honestly, I would think better of a person who went through a strategic default than someone who stayed in an upside down mortgage and paid unnecessary payments to a bank because of some imaginary moral responsibility.

    I somehow question the fact that the bank thinks they have any kind of moral responsibility to you.

  22. Johanna says:

    @Midge: Especially since you’re not even engaged yet, I think it makes sense to divide your expenses as if you weren’t planning to get married. If you do get married and merge your finances, then however you divide things now won’t matter (or it will matter very little). But if something happens and you do split up, it will matter a great deal.

    Normally, I think it makes sense for couples to divide their expenses in proportion to their incomes. But I think that going to school might be a special case. Even though his income is zero (or even negative) right now, by going to school he’s building value for himself. And that value is hard to quantify.

    So you’re right that it’s a complicated decision. I don’t think the right proportion is either 50/50 or 0/100 – it’s somewhere in between, but I’m not sure where.

    How about this for a compromise: Estimate what your living expenses would be if you (Midge) were living alone – how much would you be spending on rent, food, utilities, etc. You pay that much, and your boyfriend pays the rest.

  23. Gal @ Equally Happy says:

    @Kevin
    Yes, there’s a difference between what is legal and what is right. Legal is defined by laws and applies to everyone equally. Right is defined differently per person based on their own worldview. Trying to impose your own sense of “right” on others is not productive.

  24. Gal @ Equally Happy says:

    @Q7
    I’ve used that deal to get a copy of MS office for my personal PC. It’s the full version and works just fine. It’s good marketing on Microsoft’s part. Their marginal cost is $0 so the $9.95 is pure profit from someone who might not have otherwise purchased their apps.

  25. Tyler says:

    Also, a follow-up towards the specific couple in Q3: be careful when trying to rent with poor credit.

    My previous apartment complex, which was named by residents as the “Reghetto” instead of “Regatta”, explained how they instantly disqualified applicants with a bankruptcy on record, or with credit scores below 600. If a place that has cockroaches living on the second/third floors (not just ground level!) is this selective, you may be stuck with living in unsanitary and unpleasureable apartments for years to come.

  26. Johanna says:

    Re: Stale checks

    Not only did the landlords have the opportunity to cash the check when they received it – they also had the opportunity to notice at *any* time over the past year that they’d never cashed Shannon’s parking check, and to contact Shannon to ask about it. That they did neither of those things makes them doubly irresponsible.

    And now they’re asking Shannon for a bailout. I had no idea some of you loved bailouts so much. :)

    I agree completely with Trent and Monica. Sending them a new check would be a nice thing to do, but it’s not wrong to say “sorry, but no” – especially if money is tight.

  27. Anne says:

    I agree with Kevin. Defaulting on your mortgage when you can still afford to pay it as though it’s just one of many choices available to you without giving any weight to the promise you made is just…wrong.

  28. Johanna says:

    @Tyler: On the flip side, I’ve read that some landlords like it when their tenants are former homeowners (even if they’ve lost their homes to foreclosure), because owning a home means that you know how to take care of a place.

  29. Sheila says:

    #28 Johanna, obviously those landlords have never looked at the condition of foreclosed homes. When I was searching for a home a couple of years ago, my realtor showed me foreclosures–light fixtures ripped out of the ceiling, sinks and cabinets torn from the walls, holes everywhere, sometimes writing on the walls. I know not all foreclosures are like that, but the condition of the homes sure made an impression on me.

  30. Maggie says:

    Your obligation to pay for the parking doesn’t go away because the check is stale. You still owe the landlord the money.

    First, the UCC doesn’t REQUIRE a bank to dishonor a stale check. It isn’t illegal for them to cash it. The UCC just gives the bank the OPPORTUNITY to say, “You know, this is a really old check and we’re not convinced it’s still valid, so we’re going to refuse to honor it.” But if some bank does cash the check (and this check is only a year old, so it would not be absurd), it’s going to end up at your bank. And depending on your bank’s policies for closed accounts, you may very well end up owing them the money with a fee tacked on for NSF. You could try to tell the bank this story (“But we promised to pay this money ELEVEN WHOLE MONTHS AGO–how could you STILL expect me to pay it?!”) but Trent’s wrong. The UCC won’t protect you from your debt. And the risk you’re taking is that the bank could send you to a collection agent or put you in that Chex system which can prevent you from opening other bank accounts.

    Also, your landlord can come directly after you for the debt until the statute of limitations in your state runs out. Although the amount is small and may not be worth it, he could theoretically take you to small claims court. Or, if you piss him off and he’d prefer a fraction of the money back to you keeping it, he can send you to a collection agent too.

    Avoiding these risks and putting it behind you is worth $50. Also, your position is also not ethically defensible. You owe him the money and you’re trying to get out of paying it because he’s not very smart about his finances. The argument that you “already paid him” with the check is absurd because so far that check hasn’t COST you anything.

  31. Johanna says:

    @Sheila: Some people getting foreclosed on trash the place before they leave – either to “stick it to the banks” or to make off with whatever items of value they can. And some foreclosed homes get looted or vandalized during the time that they’re vacant. I wouldn’t assume that the houses you saw looked like that while the people were living in them.

  32. kristine says:

    A strategic default effects the value of the neighbors homes. It is not benign. It has a ripple effect, and can bring down whole neighborhoods.

    I am amazed that no one questioned the “While we can afford the payments, we do not want to live in it forever; it is too small for our growing family.” How about just adding bunkbeds and a daybed instead of a couch?

    I have a problem with people who can actually afford to make the payments deciding not to. My husband is a Quaker, and your word is your bond. Saying you will do something, and then not, makes your word worthless. The context- business, personal- is considered irrelevant. If we all strived for that kind of integrity, the world would be a better place. Banks included.

  33. Troy says:

    Regarding Strategic Default, I completely agree with it’s premise.

    The justification isn’t because banks were acting bad, however. What the other party did has no bearing on whether a strategic default makes sense and is justified.

    The only thing that matters is what the contract says and what the laws are in that specific state.

    Generally the contract states you pay, you stay. You don’t and you give up the collateral. Depending on the state laws, recourse vs non recourse, etc it is a business decision and should be looked at that way.

    I would walk in a second if I were the example couple and it were a non-recourse state.

    Morality and ethics don’t come into play in this decision. because they can’t. The contract states what will happen, not ethics. Neither party legally has any option other that what is in the contract, whether it be paying or defaulting, so one of only two pre-determined and agreed choices can be made.

    Keven, many times I agree with you, but not on this. Credit reports don’t indicate squat about trust. And defaulting on a home loan doesn’t indicate squat about trust either. It indicates a personal decision.

    People who default, especially strategically, are not “deadbeats.” Many times it is quite the opposite…these are well thought out decisions by very capable and saavy individuals who understand investment returns, tax consequences, and risk/reward strategies.

    Smart people are many times walking.

  34. Kevin says:

    kristine:

    Thank you. That’s exactly the point I was trying to make. It seems honor and integrity are becoming scarce commodities these days.

  35. Kathy F says:

    Shannon, I think you still owe them the $50. Yes, it was sloppy of them to lose the check. But why did you not notice that it was never cashed when you balance your account. Or do you not ever balance your account? It could be said that this is sloppiness on your part. Not keeping accounts balanced is what leads people to overdraft their accounts and incur overdraft charges, by the way. Or did you know that the check was never cashed and you kept quiet hoping to not ever have to “pay” the $50.

  36. Interested Reader says:

    I don’t think there’s much integrity in calling people with bad credit rating deadbeats and worthless.

  37. Johanna says:

    @kristine: Since you brought up Quakerism, I too was raised as a Quaker. One of the main premises of the religion is that you look within yourself to determine what’s right and wrong, rather than taking some supposed moral authority at their word. I think that’s applicable here.

  38. Amanda B. says:

    ” Also, your position is also not ethically defensible. You owe him the money and you’re trying to get out of paying it because he’s not very smart about his finances. The argument that you “already paid him” with the check is absurd because so far that check hasn’t COST you anything.”

    I don’t think that is entirely correct. She made a good faith effort to pay what she owed. The landlord didn’t do what was required to receive that payment. How many times would she be “ethically” required to re-write this check? Five? Ten? How long can the landlord wait until they ask for the next check? Come to think of it, how does she know for sure that this check wasn’t cashed? If the account is closed she has no way of knowing if the $50 was not received (from this check or anyother). At some point have to draw a line.

  39. Christina says:

    To the person with the daughter in school-having her move off campus will not make her independent. She has to be older than 23, married, or have a child. She could own her own home and still be a dependent as far as FAFSa is concerned. I don’t know if anyone else posted at that.

  40. Evan says:

    @Midge: You mentioned Financial Peace U. Is there something about Dave’s plan that you two aren’t agreeing with? My wife (then-fiance) made a ton of mistakes merging our finances before we found Dave. He’s hardcore about the ‘don’t do any of this until you’re married’ which is fine if you’re like that but we weren’t. I assume from the question you’re not either. If you’re looking for the best solution based on Dave’s plan and you’re planning to get married, you really just have to see your money as all being in one pot.
    YOUR saving and HIS loan are really mixed together, no?
    The alternative I guess is to keep things completely separate until you’re married and THEN go through Dave’s baby steps and tackle debt together and then build up the emergency fund.
    Last note – the fact that you’re even asking this question and working with your partner means you’ll have a much easier time of this than a lot of people do. Good luck!

  41. Christina says:

    I think in the situation with strategic default has to be looked at differently when its a condo. If they stay in a condo building that is mostly empty, they will have to shoulder more of the burden of the joint bills that the condo association pays. Not to mention, they will have to deal with freezing pipes, and possibly squaters. They have a differnt set of circumstances that someone with a single family home.

  42. Evan says:

    @Rhiannon: Sounds like you two are thinking about everything well. Having goals and working aggressively for them is all good stuff.
    One thing I learned from paying off debt was that your debt amount really affects how you measure everything else. I had about 11K in student loans, which seemed very reasonable to me. As a result it took me FOREVER to get rid of them BECAUSE it was low. Now that that’s done I look at 50K of mortgage debt and am taking many MORE steps to get rid of it faster just because the number is big.
    Instead of focusing on scrimping and saving, take everything you’ve learned and just go make more money. You said nothing of your situation so I’m being completely presumptuous, but it will be MUCH MUCH easier on you both now that the habits are established to just out-earn your problem.

  43. Shan says:

    Hi Everyone – I’m Shannon from post #10. Our decision in the end was to offer them half of the amount, in cash. They were happy with this arrangement, and we felt okay with it, too.

    @Kathy F… At the time, we used a binder system with multiple “accounts” on paper. It was confusing and we’ve switched to a better system. It often resulted in us having excess money in our account, which was nice, but could have been better used elsewhere. I realize that I painted an extreme situation of how disorganized these landlords were, but it’s frustrating to constantly be contacted for this kind of stuff after we made a big effort to be conscientious renters. I’m a little confused by the… sarcastic? tone of your message, but appreciate the suggestion that we could have noticed it, as well.

    Thanks to all for the constructive comments. It was a tough call for us, even for a relatively small amount of money, and there’s no easy answer.

  44. jim says:

    Ansley: I’d consider asking the bank if they’d do a ‘short sale’. They may or may not want to do it. If they are open to it then it should be better on your credit and a more organized sale. And it would have the banks agreement.

    Midge: I wouldn’t pay someone elses expenses until you’re actually married.

    Lauren: Talk to the HR dept. and ask them about the details on the plans. We don’t how they work, what the details are, what your specific situation is. So we can’t tell you which one is right.

    Lisa: Your daughter will not qualify as an independent student in order to get free money.

    Shannon: Pay them. If you owed the landlord $50 then you owe them $50. Just because the check is old doesn’t erase a debt. Their lack of financial skill doesn’t excuse not paying.

  45. Mary says:

    I agree with the above commenters – the financial aid peoples will not let your daughter be considered an independent unless they meet those conditions mentioned above. I had to go through that during my college years as an undergrad. My parents couldn’t help me out (stupid idea – there’s some of us that pay our tuitions/manage our debt on our own! We *do* exist!) and since I was qualified as a dependent in the eyes of financial aid, I couldn’t be an independent until I was 24 basically. Hence the student debt I am in now (will be $60k when all is said and done). Came in handy when I decided to go back to school this year.

    Q7 – My boyfriend got that through his work too! We got Microsoft Office 2010 for $10. Pretty sweet.

  46. Wren says:

    So, the new “morality” is that if you can get away with it under the letter of the law or because “everyone else does it”, then it’s OK?
    No, it’s still not ok.

    You agree to a mortgage, you made a committment, you pay it. Yeah, the market moves around. Too bad. The house itself didn’t change, and obviously you liked it well enough to agree on the price. (I realize extreme situations can cause someone to have to foreclose, but “inconvenience” is not an extreme situation.)

    As for the stale check, you agreed to the service, you got the service, you should pay for the service. I’m suprised you didn’t notice the check had not cleared. I bet if you offer them 60% in cash (rather than writing another check for them to lose), they’ll jump on it.

    Living of $1000 in that part f the country CAN be done if you really discipline yourself. BTDT.

    Call me old-fashioned, but I would never pool finances with anyone unless I’m married to them. Trent’s right, if you don’t make it to the alter (and no one thinks it will happen, but it does all the time), it will be a “gift” and you will be out your savings.

  47. Katie says:

    Oh, I’ll add that I think also relevant is the question of how much hardship you’d have to incur to stay current on your mortgage. Are you giving up a vacation or some new clothes vs. saving for retirement and your children’s college tuition vs. your ability to keep current on your other bills vs. you’d basically have to sell a kidney on the black market to keep up. I think the last and possibly the second to last are pretty unambiguous – that’s the classic case for foreclosure – but at what point you draw the line (if you do) before that is more complicated.

  48. Katie says:

    So, the new “morality” is that if you can get away with it under the letter of the law or because “everyone else does it”, then it’s OK?
    No, it’s still not ok.

    I think it’s misleading to say it’s the “letter of the law.” The letter AND the spirit of contract law are that when you breach a contract, you incur the damages specified by that contract, in this case loss of the collateral. I don’t think what’s legal is dispositive proof of what’s moral or ethical, but I also don’t think it’s accurate to frame strategic foreclosure as only technically legal either.

  49. Mister E says:

    Just for arguments sake..

    If the person in Q10 had issued another $50 cheque to pay the debt and the landlord had AGAIN never gotten around to cashing it and contacted her another year later would she still be morally obligated to pay that debt?

    What if it happened again after that?

    Is there any point where she could just tell him to go away or is she morally obligated to ENSURE that the former landlord recieves $50 from her regardless of his own ineptitude?

  50. Reader says:

    Re: Independence & Aid

    Ditto what everyone else said but also: Is this your only child? If she somehow met the bar to be independent I believe you can no longer claim her as a dependent on YOUR taxes. If you are doing so now you should check your tax status and how much you would lose. My mom was none to happy when I got married because her filing changed from Head of Household to Single which cost her a lot of tax dollars even though I was better off for qualifying for aid.

    Re: Strategic default

    Things look bad now, but ethics aside I would be wary about walking away from the loan unless you’re forced to (i.e. job loss or relocation). It looks like you have lost a lot of money, but you gain or lose nothing on the property until it is sold. Things look bad now, but if you don’t need to move RIGHT NOW, see how things look when you do. Real estate won’t look like this forever. In a relatively short time (two or three years) things will look completely different, and none of us can say how different.

    I would say look into your contract and know what your options are, but if you don’t need to move just think of your mortgage as rent and don’t worry about the paper value. If things continue to fall or your situation worsens you can always walk away from it later and won’t be much worse off than if you walked away now and rented. The rules won’t change. And if values come back you might be able to break even and not have that hit on your record or the head and heartache of a foreclosure.

  51. Paul says:

    @ #46 Wren

    “You agree to a mortgage, you made a committment, you pay it.”

    you forgot a part. you agree to a mortgage, you made a commitment, you pay for it, or you choose to execute another clause in the mortgage that states you can stop paying it and give up collateral, as well as suffer other consequences.

    it’s true that for some people, personal judgement enters as a factor here, and that’s very noble. Others are able to set asside the moral or emotional factors and look at is as a math problem. if I stop paying X and rent for Y, I’ll save Z… I’ll suffer consequences for the next few years (5-7) and as a result.

    I accept the argument that Strategic Default causes issues within a community for other buyers, but with regulations where they are now, are we so sure there’s a measurable impact — someone show me a study that shows the impact of strategic default on the greater population.

    last, to the original writer. credit score can be an issue post SD. your best bet is to secure a rental Before defaulting — before the impact and damage shows up on your credit report. I can’t wait to see how immoral THAT strategy is made out to be.

  52. Reader says:

    Those of you who say it is perfectly acceptable to walk away from a mortgage: How do you feel about people who buy a new house and state an intent to rent the old house, but do nothing of the kind and just walk away after the new house closes? Obviously there are still risks and hits to your credit, but what do you think just about the ethics of it?

    I’m not trying to trip anyone up as it is a different situation. But it is perfectly legal though more questionable ethically and it adds a new depth to the arguement.

  53. Johanna says:

    @Reader: “It looks like you have lost a lot of money, but you gain or lose nothing on the property until it is sold.”

    That’s not correct. If you’re paying (say) $3000 a month to stay in the condo, and you could rent an equivalent place for $2000 a month, then every month that goes by, you lose $1000.

    “In a relatively short time (two or three years) things will look completely different, and none of us can say how different.”

    I can say with a great deal of confidence that a condo worth $350K today is not going to be worth $450K in two or three years. And that anyone who thinks otherwise is deluding themselves.

  54. Barb says:

    For BOB re Q#6 – Early payoff of students loans…

    As Trent suggests put all of the 197.82 extra toward paying off loan #1. It will be paid in full in about 5 years +/- a month or two. Then put the payment of 122.67 + 197.82 towards loan #2 and it will be paid off in less than 10 years (starting from when loan #1 is paid off, so 14 years total). I did rough estimates rather than precise calculations.

    For precision you calculate the monthly interest/principal split of your payment by dividing the interest rate by 12 (.05 / 12 = .0041666 rounded up to .0042) then multiply the current remaining balance by the interest rate (16,732.17 * .0042 = 70.28) to get the amount of the payment that is interest, and subtract to get the amount of the payment that is principal (122.67 – 70.28 int = 52.39 prin). Then if you are making an additional early repayment against principal of 197.82 you add the 52.39 for a total of 250.21 and subtract this from principal before doing calculations for the next month.

    After paying off loan #1 in 5 years you can now put 320.49 into repaying loan #2. My rough estimate puts the payment against principal at roughly $500 a month (around 475 or so) which is nearly $6,000 a year so payoff should be at roughly 9 1/2 years. By paying off loan #1 first you can pay off both in less than the time remaining on loan #1!!! Plus watching the balances drop dramatically over those years will help you stick to it. Good luck!!

  55. jim says:

    Johanna: “I’ve read that some landlords…”

    Some landlords are idiots. Now you’ve read that too.

  56. jim says:

    Shan #43 : “Our decision in the end was to offer them half of the amount, in cash. They were happy with this arrangement, and we felt okay with it, too.”

    Fair deal. If you’re happy and they’re happy then everyones happy.

  57. jim says:

    Reader #52 : “How do you feel about people who buy a new house and state an intent to rent the old house, but do nothing of the kind and just walk away after the new house closes?”

    That may qualify as mortgage fraud.

  58. Johanna says:

    @jim: “Some landlords are idiots.”

    I don’t doubt it. What exactly is your point?

  59. jim says:

    I don’t think that strategic default has a black or white “good or bad” type of answer.

    A multi-millionaire who walks away from a mortgage simply because they can is not the same thing as a family struggling to make ends meet on $50k a year who have a house $200k underwater who try to work with a bank and finally give up.

  60. Troy says:

    #52 reader.

    What you describe is mortgage fraud. Indicating that you will rent a current home simply to obtaing a new mortgage with no intention of doing so and instead walking is a crime.

    It is unlikely though. Most lenders require 20-25% equity in a current home before they will loan on a new purchase. That makes walking unlikely as the seller would benefit more from selling than walking.

    Making false statements on a mortgage application is criminal. Not paying a mortgage is not. Big difference.

  61. par717 says:

    I am glad Q10 Shannon made a fair deal with the landlord and that’s great. Personally I wouldn’t have done that. I don’t look at it from a debt paid/not paid standpoint, look at it from the other end.

    If I was the landlord and forgot to cash a check for $50 for a year I would be embarrassed to call up and ask for that $50. First of all, it was for parking, which does not bear any cost to me as a landlord. Second, it is a year later. I would just chalk it up to a “Stupid Tax” and call it a day and shred the check.

  62. Reader says:

    @ Johanna

    Yes, I can do math too. You are absolutely correct that 3-2=1. But that wasn’t part of the original question or explanation. I was merely pointing out something that hadn’t been discussed: the fact that someone could mess up their ability to be a homeowner for the same amount of time that major paper appreciation could happen as the market stabilizes. A lot of people are doing a lot of hand wringing about how much they have *lost* on a home that they otherwise would have no intention of moving out of, at least not in the near term. And when someone like Trent says ‘There are downsides, do the math’ don’t really know what that could entail.

    Though when you said:

    “I can say with a great deal of confidence that a condo worth $350K today is not going to be worth $450K in two or three years. And that anyone who thinks otherwise is deluding themselves.”

    I have to admit I laughed, since if you switch the numbers that’s pretty much what a lot of people were saying three years ago. IN this case $250k-$450k would be 8.7% appreciation which is very generous and I agree unlikely, but not unheard of. But with that aside I didn’t say it will be worth $450k. I said that they could break even. In three years they could easily pay off $20k+ with their payments, depending on the specifics of their loan. And who knows what the value will be?

    For example: if they stay for four years and have 5% appreciation they would hit an inflection point. In four years how much repair would they have made to their credit after foreclosure? How much will it have cost them in higher rates? It is entirely reasonable to come up with a scenario where they break even and are ultimately ahead by not having a foreclosure on their record. I was throwing it out there as a consideration.

    That also assumes her numbers are accurate. I don’t even try to calculate the value of my properties because things are all over the place. In my area we have $150k foreclosures a couple blocks from $225k private sales on virtually identical houses. In a friend’s neighborhood a house just listed for $1.5M that would have listed for $450k two years ago and $850k two years before that, but the neighborhood doesn’t see much action so they’re shooting in the dark. As I said, right now it’s all on paper.

    And yes, that assumes rent is about the same as a mortgage. Since she didn’t indicate one way or the other I can’t comment, but then I didn’t offer any advice in the first place, merely a consideration. It is a complex and dynamic problem that requires a lot of projecting into the future, something I doubt many of us are good at.

    $100k is a lot of money and just seeing that makes you want to cry in frustration. But how large it seems (“I could never come up with that much money!”) can make people freak out and do rash things. I was just adding some perspective.

  63. Reader says:

    @#60 Troy

    “What you describe is mortgage fraud…Making false statements on a mortgage application is criminal.”

    I don’t remember anything in my mortgage contract saying that I will keep paying on my current mortgage. I am not arguing your point but simply saying I don’t remember any reference to other assets/debts as part of the legal contract so that such would be legal fraud. Either way it would be hard to prosecute (“I MEANT to rent it and couldn’t…”) but something illegal would obviously be outside ethics. So could you elaborate?

    “It is unlikely though. Most lenders require 20-25% equity in a current home before they will loan on a new purchase. That makes walking unlikely as the seller would benefit more from selling than walking.”

    I’m not sure who you’re talking to, but I passively know over a half dozen people in the Las Vegas area who are 100%+ LTV on a mortgage and bought a new house. Some just walked away and some attempt faithfully to rent. But none want to be landlords however couldn’t sell it for what they owed. At least one pretty much moved to the same house in the neighborhood that they bought for much cheaper then walked away from the old one.

  64. Katie says:

    #64 Reader: “I don’t remember anything in my mortgage contract saying that I will keep paying on my current mortgage. I am not arguing your point but simply saying I don’t remember any reference to other assets/debts as part of the legal contract so that such would be legal fraud. Either way it would be hard to prosecute (“I MEANT to rent it and couldn’t…”) but something illegal would obviously be outside ethics. So could you elaborate?”

    If they don’t ask and you don’t make a statement about your current mortgage and what you intend to do, then I think you’re fine. But if you do and they take that into account in determining whether to grant you the new mortgage, then you’re inducing them to give you the mortgage under false pretenses, hence fraud. I’ve never gotten a mortgage so I don’t know when/if that conversation would come up, but I think any false representation you make to a mortgage lender that makes you look more credit worthy and able to meet the obligation than you are would be fraudulent. This is the same reason it’s generally illegal to borrow money for your down payment; the mortgage lender is assuming that the amount of your debt is for the 80% (or whatever) amount of the mortgage, not that you’re also compromising your ability to pay by having the additional 20% of debt as well.

    You’re right that it would be hard to prove though. In theory, if you went around talking about it beforehand those people could testify about it in court. I’ve heard of the borrowing-a-downpayment thing coming back to haunt people in bankruptcy proceedings. But yeah, generally you’re probably pretty unlikely to get caught.

  65. jim says:

    Unlikely to get caught doesn’t equate to legal.

    If you own a home with a mortgage and then go get a new mortgage they will ask what outstanding debts you have. If you then tell them you plan to rent your current house and have no intention of doing so then that equates to fraud. Just cause someone knows people who did it and got away with it doesn’t mean it wasn’t technically mortgage fraud or that its OK.

  66. kristine says:

    Johanna,

    You are so right about the looking within. I guess just looked within, and found a different answer. In that approach, there is an assumption of real reflection and digging deep. If someone digs deep and has no problem- who am I to judge? But if they know it seems wrong, yet they do it anyway, they damage their own spirit more than anyone else.

    While I respect the Quaker faith immensely, I find it does not account for sociopaths, who make up not an insignificant percentage of the population. But that’s a whole other discussion.

    Kevin, thanks for the kind words. Genuine, to be sure, as we have definitely not seen eye to eye on everything!

    -Kristine

  67. TC says:

    Q10 – I see the point that they are not obligated to write a new check, but I do not see how “money is tight” has any bearing on the decision. If it’s the right thing to do, you do it.

  68. Tejaswi says:

    @ Ansley:
    1. Strategic foreclosure: yes morally wrong but you need to make a cold financial rational and legally allowed decision. Really, if there was 1 job, 10 applicants, no other source of food except the job which pays only sustenance food for only 1 person, then somebody please explain to me how it is moral to fight for the job, get it (assuming you were the most deserving candidate) and let 9 people die of starvation? (or for e.g. only feed your child and let 9 other children die)
    2. But question really is are you really sure it benefits you? (and I am yet to hear of any situation where it benefits any seller (who is capable of paying, i.e.)).
    2. Unrealized gains/losses are meaningless. You lose a lot, gain improved cash flow. Unless the money you save over 7 years is sufficient to buy a similar home at a lower price and/or you can end up with a lower payment (and can you really be sure your existing undervalued home would not have recovered in 7 years? Or that interest rates would be lower than your existing interest rate?)

    @Wren and similar people:
    “You agree to a mortgage, you made a committment, you pay it. Yeah, the market moves around…”

    Nobody makes a commitment when buying a house. They sign an agreement with gives & takes.

    You make a commitment when you say “I do” at the altar to your spouse. You sign an agreement when agreeing to alimony payments at divorce proceedings.

    Now, don’t mistake my callousness. I think anybody who says “strategic foreclosure is morally wrong” are really good idealistic people and other people should emulate their behaviour. I mean it. This world would be a great place if everybody was like that.

    But one needs to be practical about this. People say “I do; till death do us apart” and then get divorces. People say “pro life” and then eat meat (isn’t it killing life?) and support “just” wars or killing terrorists. You need to be either ideal and consistent or be practical and pipe down. Are you going to ban divorce and force veganism? Forcing idealism is like communism (“thou shalt share”) which failed. Allowing human greed to thrive and channel it with appropriate legal enforcers is why capitalism has done better. No comments on how much regulation / enforcement is needed or whether banks are really suffering as they should in laissez-faire capitalism though. That’s another hot button issue.

  69. Leah W. says:

    I second Maggie!!! Trent, DO NOT DO WILLY NILLY LEGAL RESEARCH AND THEN GIVE LEGAL ADVICE ON YOUR BLOG! I don’t know how many times I have to tell you this.

    Maggie is absolutely right — the bank doesn’t HAVE to pay it, but it can, and most banks do! In that case, congratulations, you’ve just written a hot check. Let’s hope that’s not a felony in your state.

    Pay your old landlord. It’s just $50.

  70. Troy says:

    Reader:

    When you apply for the new mortgage, you have to detail your current mortgage. You have to indicate what your plans are for the exisitng home (primary, secondary, investment, etc). If in order to qualify you indicate you will rent it, you must state as much.

    It is difficult to prove, but still murky from a legal standpoint. My original point was there is nothing legally murky about strategic default.

    Buy and bail (the common name for what you describe) is considered fraud and is being prosecuted.

    regarding the 25% equity stake, that is a fairly new rule from Fannie mae and Freddie Mac to stop buy and bail. Due to exactly what you stated, that people were simpy getting a new loan and then walking, investors typically now require equity in the existing home, but as I said that is a fairly recent development.

    Don’t get me wrong. I am for playing within the rules. If the rules allow you to walk, then that is a solid consideration. Just like bankruptcy is a viable option for some, so is default.

  71. Erin says:

    Why doesn’t anybody mention that in many states, if you walk away from a mortgage the bank can sue you for the difference between what they sell your foreclosed house for and what you owe? I don’t know if that applies to the writer’s state but they should certainly find out before doing anything.

  72. Johanna says:

    @Erin: I did mention it.

  73. getagrip says:

    Morals aside for a moment, waiting for a few years for the strategic default is a problem. The mortgage protection act (true name escapes me at the moment) of 2007 is only in force until 2012. Without that act, you could walk away (be it forclosure or strategic default) and any forgiven amount is taxed as income by the IRS. So for example, a home with a $450K loan, you walk/can’t pay, bank forcloses and chooses not to pursue you for the difference and the value of the property at the time of forclosure in $300K, you’ve been given $150K of relief by the bank. The IRS considers that income, like a nice big gift. If you strategically defaulted, you likely had a near six figure income for that kind of mortgage, so the amount, even if it doesn’t push you into Alternative Minimum Tax land (e.g. > $250K salary for the year), would be at 33%, so you’re looking at owing the IRS $50K. This kind of loss would previously have made strategic default less attractive.

    So if you wait too long to make that decision, there is no guarantee that this exclusion will be in place after 2012.

    The second reason for not waiting if you are going to bother doing this, is that there is no legal reason the bank can choose not to forgive the difference and come after you for that $150K in the above example. Just like turning in a car to the dealer, they sell the collateral, but you’re still liable for the difference between what they sell it for and the loan amount. The lenders don’t typically go after folks who have foreclosed because they know it’s not worth trying to get blood from a rock. But if you strategically defaulted, as the smoke clears from all the forclosures, it will become easier to discern the strategic defaulters from the hard luck cases and my guess is they’ll be more than willing to go after them to help recoup their losses.

    Just something else to consider in such a decision.

  74. littlepitcher says:

    South Georgia housing prices are cheap. The climate is moderate in the winter, but summer AC will run your bills up fast. Farmers’ markets make for cheap veggies and fruits.
    1-You do not have to dress like a model on a $31G/yr job. If your coworkers are bi***es, let the boss know and advise all of them, publicly and tactfully, in his presence, that you no longer can afford the expense of their dubious fashion-worship.
    Tear up the credit cards. First, try to renegotiate your interest rate to a lower one; if that doesn’t work, let your credit card company know you want to “opt out”. This will freeze your interest rate. Then pay a little over minimum each month, because minimum never lowers the actual balance, due to that ghastly interest.
    If you have medical bills, renegotiate the minimum payments with the providers. Let them know why.
    If the dope man is getting all of your money, STOP. Go into 30 day residential treatment, if you have to, and let your mother or mother-in-law stay with your child. Your insurance may pay for it, and your employer is required by law to allow an absence for that purpose, but once only.
    Your salary is not bad, for your area and gender. You can get solvent, but only if you work on it.

  75. Katie says:

    Littlepitcher, what on EARTH made you think she’s spending her money on fancy clothes and drugs? And your salary is “not bad for your gender”? Really? Last I checked she was head of household; if it would be difficult for a man to raise a family on that amount, it’s difficult for a woman to do so.

  76. Johanna says:

    @jim: “I don’t think that strategic default has a black or white “good or bad” type of answer.”

    Was this supposed to be part of our exchange about landlords? Even if it’s not: Landlords don’t do credit checks on prospective tenants because they want to punish people with bad credit for being bad people. They do it to minimize the chance that they end up with tenants who don’t pay the rent.

    I’ve never been a landlord, but if I were, I don’t see why it would make sense to act as if someone whose only black mark on their credit was a strategic foreclosure is equally risky as someone who has a history of falling far behind on credit cards or other bills.

    “A multi-millionaire who walks away from a mortgage simply because they can is not the same thing as a family struggling to make ends meet on $50k a year who have a house $200k underwater who try to work with a bank and finally give up.”

    Again with the “work with the bank” – why is this so important to you? The bank is not your buddy. It is a business that exists to make money, so it will only work with you if it sees that as the option that will make it the most money.

    It might, however, pretend to work with you – agreeing to list your home as a short sale, but taking forever to consider any offers that come in before eventually rejecting them all, for example – in order to squeeze as many mortgage payments out of you as it can. In this case, “trying hard to work with the bank” is just being a sucker, and postponing the inevitable. I don’t see that as a particularly moral course of action – just a fairly foolish one.

  77. Stephanie says:

    Is everyone forgetting that banks are forclosing on homes illegally? Bank of Amereica forclosed on a man who paid off his mortgage and other banks are using forged documents in order to forclose on homes. In some cases, banks don’t even have the promissory note for the home, but are foclosing on it anyway. Also, a lot of mortgages have illegal signatures on the original paperwork–ie: not a “real” signature, but a computer generated one.
    This whole problem started because bankers became to greedy and took advantage of people.
    Now homeowners are *supposed* to consider what is ethical with regard to mortgages??? Why do people have to act ethically when banks can do whatever they please? That just doesn’t make sense to me…

  78. Interested Reader says:

    @littlepitcher – what caused that bizarre outburst? There’s nothing in her question to indicate she’s spending money on clothes or drugs.

    U

  79. Jonathan says:

    @ Stephanie (#77) – “Now homeowners are *supposed* to consider what is ethical with regard to mortgages??? Why do people have to act ethically when banks can do whatever they please? That just doesn’t make sense to me…”

    The behavior of the other party should have no bearing on whether a particular act is unethical or not. If I borrow $50 from a co-worker is it ethical for me to choose not to repay him because he’s a jerk and cheated another co-worker out of some money the previous week?

  80. Lou says:

    re: Q5 – check to be sure whether the 403(b) account is TIAA-CREF or equivalent. Many universities and colleges offer matching contribution on TIAA that they do not on other plans.

  81. jim says:

    Johanna #76, no my comments you replied to weren’t about landlords at all. I was talking about the general strategic default topic.

    I don’t consider banks my buddy but I also don’t consider them black hearted evil entities that only exist to abuse everyone they deal with.
    I personally consider working with a bank to be better ethically than an outright strategic default. I don’t see any reason to not try to work with a bank and there are many benefits to doing a short sale over a foreclosure for both parties.

  82. Tara C says:

    I would research the tax and financial implications for the condo strategic default – if lots of other units in the building are in foreclosure, that could put them in a bad situation with the condo association (lack of funds to run the bldg properly). In their situation, I would be tempted to default as well. They should be sure to secure a rental and any other services requiring a credit check before defaulting.

    In regards to all the comments about whether or not breaking a contract is immoral, I am reminded of a personal situation where my husband was offered a 2 year employment contract by a company on the other side of the country. Being young and naive, we thought that having a contract actually meant the company had to do what they agreed to do. We sold our house, moved across the country, bought another one, and 4 months later he was fired for no reason (along with most of the other senior employees of the company in an unexpected management change). They refused to honor the employment contract and pay him the additional 20 months of salary owed. That’s when we learned the hard way that a written contract doesn’t give you anything other than the right to sue when the other party doesn’t hold up their end of the deal.

    As a result of that lesson my opinion is that a mortgage is just a contract like any other, with no moral implications, only business ones.

  83. imelda says:

    To all the people who insist that “strategic default” is immoral, I just have to laugh. Why do you demand selflessness from the individuals and not from the banks? Why is a bank allowed to act like a heartless machine when it comes to issuing dangerous loans to vulnerable lenders, but also entitled to be treated like a moral creature deserving of ethically-based “fairness” when it comes to paying them back?

    The banks that made money off of dangerous loans are in the wrong. They say that consumers should have educated themselves and made legally savvy, self-serving decisions when it came to taking out a loan… But when it comes to “strategic foreclosure,” they should be guided by morality rather than the letter of the law? I don’t think so. Not until the banks start letting morality guide them, too. Until then, it’s a business contract and nothing more.

  84. AnnJo says:

    I wish there were some quick and easy way to distinguish between the people who believe as Johanna, Stephanie, and Imelda do and the Kevin/Jonathan/me type people, so we could each do business with our own kind. I don’t know Jonathan or Kevin, but I’m pretty sure if I made a deal with them, I’d know exactly what would happen. Whereas with others here, it would always be a total mystery to me what considerations might sway them to keep or dishonor our deal.

    I grew up in a family of business people, and saw many a sizable deal hammered out over coffee at a diner and scribbled out in bullet-points on a paper napkin. My father’s philosophy was, “Sure, do up a contract in writing so if someone croaks, their family will know what was going on, but don’t do business with anyone you NEED a written contract with.” In my experience, there are still many people (including bankers, by the way) whose word is their bond. But I guess there are many of the other kind as well.

  85. ML says:

    @Trent’s Response to Question #1 (Stacy)

    I do not think it is safe or practical to rent a room in someone’s home if you have a small child. This would have definitely been an option if she was not a mother.

  86. Charlie Park says:

    Re: Q10 / Stale Checks

    It looks like the issue’s been resolved (comment #43), but I wanted to add my voice to the “no, you don’t have an obligation” side of the conversation. If Shannon had paid them $50 in cash, and they lost the money, she wouldn’t be obligated to pay them back. By giving them the check, they made a good-faith effort to pay the debt. If the landlord had lost the check in the first month or two and had asked for a second, it’s totally understandable that they’d ask for a second one. But a year in arrears? The landlord should have absorbed it as a cost of doing business.

    Paying half in cash now was good of you, Shannon. I think it was an appropriate resolution, and if I were in your situation, I’d probably do something similar. But the arguments in the comments above about there being a moral/ethical duty to pay the $50 are odd.

  87. imelda says:

    Well shucks, AnnJo, thanks for maligning our integrity. God knows disagreeing on a single issue is a sure sign someone is untrustworthy. Johanna, Stephanie and I must be real scumbags in real life, huh?

    My point has been, and always will be, that your arguments, and people of your, Kevin, and Jonathan’s “type” are too judgmental. Thanks for proving my point. ;-)

  88. Johanna says:

    My argument is not “Banks are evil, so they deserve to be treated with evil in return.” It’s “Transactions between banks and customers are bound by a certain set of rules, and there’s no such thing as a moral obligation – on the part of either the bank or the customer – to do more than those rules require, or less than they allow.”

    And I guess I take that view because I don’t see how it would even work for banks to “start letting morality guide them,” as imelda puts it. We talk about banks like they’re people, but they’re not. They’re corporations with hundreds or thousands of employees, each with their own job to do. You might put your personal trust in one of them, but the decision to foreclose on your house (for example) is a different person’s call.

    So many people (commenters here and politicians alike) seem to think that the solution is for “the banks” to wake up one morning and say “OK, let’s start being more moral/less greedy now.” I can’t even conceive of how that would happen, let alone why we should expect it to.

    As has been pointed out, the banks actually aren’t even playing by the rules. That’s true, and it’s really troubling, but it’s irrelevant to the question of strategic default.

  89. Amanda says:

    Living off campus does not make a student count as an independent. I started college in my 20s and didn’t count as an independent until I got married, despite never living on campus and paying for almost all of my bills (save insurances).

  90. sewingirl says:

    I think that looking at a strategic default in moral terms is giving it a power that it doesn’t have. If the couple walks away from paying $450,000 for a home thats worth only $350,00, they are immoral delinquents? Is the bank that accepts $450,000 for an asset thats really only worth $350,00 also immoral? Its nice to look back to the day when a persons “word was his bond.” But thats only true and valuable when you have a level playing field, and I think we all know thats far from the truth in the financial world of today.

  91. AnnJo says:

    Imelda, you have made a judgment that I’m “too judgmental” because I made a judgment that I don’t understand your moral compass? I could fairly say: How shockingly judgmental of you! But since making judgments is a, perhaps THE, key human survival skill, I’ll give you a pass on it.

    Since I’m “too judgmental” by your standards, you might choose not to be my friend. Do you have a right to decide to do that? Of course. And it would be darned thin-skinned of me to be insulted by your decision.

    The fact that I don’t “get” your moral take on contracts means I wouldn’t want to get into a contract with you. I honestly don’t know why you would find that insulting; you obviously don’t “get” my moral take on contracts either – it’s a mutual lack of understanding. In such a case, surely the best course is to avoid contracting with each other, isn’t it?

    Ironically, for someone who is “too judgmental,” I think I am presenting the more tolerant point of view. I advocate only that people of like business views would be well advised to stick to their own kind in business dealings, while your position seems to be that I should change my views of business morality to coincide with yours so that you don’t have to tolerate the implicit challenge to your integrity.

    To be clear, though, just because I wouldn’t want to do business with someone doesn’t mean I think she is a “scumbag.” Johanna, for instance, stikes me as a very interesting person whose thinking is different from mine but mirrors the thinking of some of my closest friends. I could easily see being friends with her. And part of what makes her interesting is that she is VERY judgmental, a quality I value in people.

  92. Stephanie says:

    I am disheartened that a difference of opinion has led to some ugly posts….
    The fact remains: the banks rubber stamped loans fully expecting people to default on those loans. Banks then lied when assessing the value of the house (remember that the banks hire the assessors!) to get the loans approved and give homeowners an inflated sense of security. Then the banks chopped these subprime mortgages up into pieces, in order to sell and resell them to investment groups. Now, did the banks think about what was moral when they openly lied about what these loans were? Did the banks think about what was moral when they rated these subprime mortgage investments “AAA” in value and security?
    Clearly, the banks did not act in a moral manner…but now, I as the homeowner, am supposed to consider morals and ethics when I want to abandon a bad mortgage that was set up for me to default on in the first place?
    Judge me all you want, but I understand that I am fighting against an unfair opponent that lloks to make money off of me at every chance that they get. I make no apologies for doing what is right for my family in abandoning a mortgage.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>