Take the 2-minute tour ×
Personal Finance & Money Stack Exchange is a question and answer site for people who want to be financially literate. It's 100% free, no registration required.

I bought a house in 2006, at the height of the boom. Now I owe more than $100K what the home is worth, and considering walking away from my mortgage.

(I'm in California, which is a "no recourse" state; the bank can take the house and ruin my credit, but that's about it. The bank won't approve a short sale because I'm in good shape financially; I can afford the mortgage, it's just foolish of me to pay the bank $100K simply to protect my credit rating.)

But my spouse and I have perfect credit right now; it would be painful to lose that.

We're considering a temporary divorce, transferring the house to my name only. I'd abandon the mortgage, take the credit hit, and remarry my (ex-)spouse. (We're very much in love; we're considering the divorce only for financial reasons.)

The question is: would this help us avoid ruining our credit? Or would it just be a big legal hassle to no one's benefit?

share|improve this question
5  
What's your motivation for walking away, Dan? (Please don't reply, "The house is worth less than I paid.") The "why" is currently missing from what you describe and will help folks to respond. –  gef05 Aug 24 '11 at 10:28
5  
-1 We should not be in the business of aiding and abetting fraud. –  jprete Aug 24 '11 at 13:29
3  
Keep it open. Even though I think it's a terrible idea, the question itself is useful. I bet there are a lot of other people that are in the same situation and thinking about similar schemes. –  Tony the Pony Aug 24 '11 at 13:41
5  
For pity's sake, you are considering a divorce, just to 'save' $100K? Get a grip on reality. Some things are more important than money. –  DJClayworth Aug 24 '11 at 13:42
10  
I think this question should stay open. The reason is that the OP doesn't think what he's about to do is illegal (and it's not 100% clear that it is), so the answers should be here to point out why it would be fraud instead of closing it as an obvious illegal activity. –  Michael Pryor Aug 25 '11 at 17:12

2 Answers 2

up vote 21 down vote accepted

If you're not insolvent, doing something like this is both a moral and legal hazard:

  • The Tax authorities may consider the $100,000 write-down as income. So you'll potentially transform a debt to the bank to a smaller debt to the IRS and State Tax department.
  • What you're proposing to do is an act of fraud. (probably a felony)
  • California is a community property state, which would make this particular scheme more complicated, since you and your wife own equal amounts of the property by statute.

When you are insolvent, the tax and moral hazard issues can be a non-issue. Setting up a scenario that makes you appear to be insolvent is where the fraud comes in. If you decide to go down this road, spend a few thousand dollars on competent legal advice.

share|improve this answer
    
For at least 2011, the forgiven debt on primary resdense is untaxed. This may extend into 2012, not sure about that yet. Agree with the rest of your answer. Felony is a bad thing. –  JoeTaxpayer Aug 27 '11 at 2:45

My advice to you? Act like responsible adults and owe up to your financial commitments.

When you bought your house and took out a loan from the bank, you made an agreement to pay it back. If you breach this agreement, you deserve to have your credit score trashed.

What do you think will happen to the $100K+ if you decide to stiff the bank? The bank will make up for its loss by increasing the mortgage rates for others that are taking out loans, so responsible borrowers get to subsidize those that shirk their responsibilities.

If you were in a true hardship situation, I would be inclined to take a different stance. But, as you've indicated, you are perfectly able to make the payments -- you just don't feel like it. Real estate fluctuates in value, just like any other asset. If a stock I bought drops in value, does the government come and bail me out? Of course not!

What I find most problematic about your plan is that not only do you wish to breach your agreement, but you are also looking for ways to conceal your breach. Please think about this.

Best of luck with your decision.

share|improve this answer
3  
It may very well be the case that the bank insured itself against a loss, but the fact remains that someone else gets to pay for the OP's breach. I can sympathize with him wanting to look out for his own interests, but at least he should be a man about his decision instead of concocting some hare-brained scheme to hide it. –  Tony the Pony Aug 24 '11 at 9:25
3  
@Jen - Do you believe a person who is well off, as the OP himself says, and thinking of fraud, if I may say, will ever listen to reason. And he is exploiting the system to his benefit, he is giving a damn about others. –  DumbCoder Aug 24 '11 at 11:00
6  
I agree, how would you (the OP) feel if housing prices shot upward and the bank pulled some shenanigans like this to kick you out of your house so they could resell it and capture the extra equity? –  JohnFx Aug 24 '11 at 13:25
3  
The issue here isn't walking away from the mortgage. The law in non-recourse states allows debtors to do that with limited consequence. Laws like this or insurance policies that let you encapsulate risk create moral hazards... agree or disagree, that is the law. Doing what's good for society, etc is not relevant here. The issue here is that the OP wants to do something that crosses the line into fraud territory. –  duffbeer703 Aug 24 '11 at 13:51
2  
Agree. The potential fraud part concerns me far more than the "strategic default" –  Tony the Pony Aug 24 '11 at 13:55

Your Answer

 
discard

By posting your answer, you agree to the privacy policy and terms of service.

Not the answer you're looking for? Browse other questions tagged or ask your own question.