'Zombie Debt' Makes Strategic Default Less Strategic

NEW YORK (MainStreet) -- Homeowners who decide to stop making payments on their homes despite having the financial ability to pay their mortgage – a process known as strategic default – are growing in numbers.

A 2010 study by Experian showed that one in five mortgage delinquencies came from homeowners “walking away” from their mortgages. That’s twice the number of strategic defaults in 2006, and in especially hard-hit areas like California (where such defaults are running 83 times higher than in 2005) and in Florida (53 times higher than in 2005), strategic defaults are running much higher.

But increasing numbers of legal and economics professionals say that even if you walk away from your mortgage, “zombie debt” — or old debt left behind – can still follow you and strangle you financially.

For homeowners thinking about walking away from their underwater mortgages, the issue of zombie debt may be a huge wake-up call. In fact, a growing number of banks and mortgage lenders are going after homeowners who wander away from their homes and leave the debt to the financial institution.

Most states don’t stop them from doing so. In fact, 41 states allow mortgage lenders to take homeowners to court for any mortgage debt that remains after a foreclosure auction sale. Banks don’t always go after strategic defaulters, but the data shows that lenders are more inclined to take legal action against homeowners who walk away from their mortgages but can actually afford to keep making payments.

In other words, just because your home is worth less than you paid for it, banks and lenders don’t accept that as an excuse to stop paying for the loan. With an average of $100,000 on the line in unpaid mortgage debt, banks are awakening the zombie debt attached to strategic defaults and using it to horrify “walkaway” homeowners.

So consider yourself warned. If you are thinking about walking away from your home mortgage, make sure you know the stakes.

Start by checking to see what the rules are in your state on strategic defaults. The foreclosure website ForeclosureFish.com has a useful directory of deficiency judgment statutes in all 50 states.

If you do your research and decide to go forward with a strategic default, know that the odds of zombie debt following you around are high – and getting higher.

For more of the latest news on the housing market, visit MainStreet’s “Real Estate” topic page!

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