Strategic Default: What Is It and Can It Help Me?
Strategic default can be useful to relieve yourself of the burdens of a mortgage while minimizing the negative consequences. Let’s say that the home you purchased turned out not to be such a sound investment—it may be time to walk away from it. While many people think of this as strategy homeowners take to stop making payments when they cannot afford to make them, the benefits can outweigh the negatives.
How does strategic default work?
Let’s take the most common example as to why some may choose strategic default. Usually, when you owe much more than what your home is worth, ceasing payments is much more worthwhile than continually paying down on the home. When this happens, the mortgage loan company will have no choice but to begin foreclosure.
There are some of the advantages of strategic default:
- Can reduce the amount of debt you carry
- The money saved can be used to fund other investments
- You are no longer responsible for the payment of your loan
- You can give up payments on properties that hold no value
Strategic default also encompasses cases where it becomes a practical decision, which was carefully planned from a purely business perspective. Some choose this route even if they can afford to make payments. It all comes down to what works best in the long-run, and a bad investment is a bad investment, no matter how you cut it. That is when it is best to cut the losses as quickly as possible.
What are the downsides?
There is looming fear, though, for many that strategic default can ruin one’s credit. Similar to other forms of debt relief, such as bankruptcy, your credit score can take a dip, but if you had a score that was strong to begin with, the drop is slight—perhaps about 150 points, give or take. You may find some difficulty applying for another loan in the next several years.
Other downsides one could face may mean that you have difficulty renting an apartment or a condominium. Landlords may consider this when deciding whether or not someone is a desirable tenant. In a similar way, some employers may also run a credit check and use that to make a hiring decision. This may not be the case for you, but should be something to keep in mind in the future.
Have additional questions? Contact us!
Your financial situation will be different from others’. You can turn to our Chicago bankruptcy lawyers for counsel. We are here to point you in the right direction and find a debt solution that is tailor-made and specific to your needs.
When you are ready to begin, contact Atlas Consumer Law to help you determine if strategic default is right for you.