Underwater on the mortgage...options? **Update**

[rnorwo1]

Hi All,
My aunt's husband just died last week, and sadly she does not even have time to grieve because she cannot cover basic expenses... loads of debt and very little life insurance. I have been organizing all of the debts for her so we can properly assess and plan. The big unknown is her mortgage... we're not sure yet exactly how much underwater she is, but she needs to get out of the house fast or the monthly payments will eat away what little money she may have left over from the life insurance. She's only 61 and she has no retirement to speak of, so she needs to hang on to every penny she can.

I'm bringing her to a financial planner, and we may end up seeing an attorney to discuss other options if the planner thinks it's necessary. But as I think of different scenarios myself, I was wondering if there are any options for the mortgage other than a short sale or bankruptcy? Do banks ever let you just turn the keys in and walk away and not sue you for the difference if they can't sell it for what is owed? Would the death make a difference? Are these big banks ever sympathetic in such circumstances? They're in good standing with all of their bills, for now, if that would help. Thanks for any ideas/directions!

 

[jgates]

Check with the bank or mortgage company just in case there was any type of insurance associated with the loan. Pretty unlikely on a mortgage, but it never hurts to ask. If he was employed check for any employee policies (we have one equal to 2x our salary, plus additional purchase policies for accidental death if we want). If he was a member of any groups or organizations, check to see if they may have had a policy with them.

One danger with walking away or shortselling is she might get a 1099C (Cancellation of Debt) generated which she will then have to claim as income on her taxes.

 

[Bibbidi]

I hate to be the bearer of bad news--my husband was recently appointed executor of his late step-mom's estate because his dad is unable to manage the assets himself and from what I can gather, we have to maintain the mortgage on her home (house was in her name) until it can be sold, because the mortgage company is considered a creditor, and they must legally be paid with proceeds from life insurance policies, etc. There is no benefit to beneficiaries (i.e. your aunt) until all debts are paid. So unfortunately, she may have to spend any money from any life insurance policies on the mortgage. That is my understanding at this point with our situation at least. We will be hiring an attorney soon to help muddle through a myriad of issues with our particular circumstance. It's a true nightmare when you're left with a situation where policies don't cover outstanding debt. I wish you and your aunt the best.

 

[Kay1]

If she can live with a relative, maybe she could rent out the house until the mortgage is paid off. You are very kind to help her.

 

[rnorwo1]

Thanks for the replies... unfortunately we've exhausted all of the policy options (there is one more that we're pursuing, the attorney will be helping with it, but it's a long shot.) I'm aware of the 1099-C, but that is better than having to be responsible for the entire amount, I think... we're definitely going to look at settling some of the credit card debt so I'm sure we'll have to pay taxes on all of those amounts.

I wonder, if we cannot sell the house for anything close to what she owes, is life insurance protected in bankruptcy (we live in Louisiana if that helps.... my sister googled that question but it was kind of unclear, to us at least.)

If anyone else has any other suggestions, I'd love to hear them... thanks!

 

[Keli]

I don't believe life insurance is a part of the estate? That is money that goes to an individual, not added to the assets of the deceased. At least that's how it worked for the few situations in which I've been involved.
Is the house/mortgage in both aunt and uncles's names? If so then I don't think you'll have any other options.

 

[bellarella]

I hate to be the bearer of bad news--my husband was recently appointed executor of his late step-mom's estate because his dad is unable to manage the assets himself and from what I can gather, we have to maintain the mortgage on her home (house was in her name) until it can be sold, because the mortgage company is considered a creditor, and they must legally be paid with proceeds from life insurance policies, etc. There is no benefit to beneficiaries (i.e. your aunt) until all debts are paid. So unfortunately, she may have to spend any money from any life insurance policies on the mortgage. That is my understanding at this point with our situation at least. We will be hiring an attorney soon to help muddle through a myriad of issues with our particular circumstance. It's a true nightmare when you're left with a situation where policies don't cover outstanding debt. I wish you and your aunt the best.

Wow, what a terrible situation for your DH's family.

This is one of the reasons that I own the life insurance policy on my DH and he owns the one on me. This way, the proceeds are not part of either of our estates. Essentially, I bought a policy on my DH's life and named myself as the beneficiary (and vice versa).

 

[mistysue]

Most of the questions you are asking vary by state, so keep talking to professionals in your area about it.

I do know that in Michigan, I know somebody who is setting on TONS of credit card debt and because her income is low enough she doesn't have to get 1099-C's for it. Somehow it is just being completely forgiven so it can't hurt to ask about that.

 

[rnorwo1]

I don't believe life insurance is a part of the estate? That is money that goes to an individual, not added to the assets of the deceased. At least that's how it worked for the few situations in which I've been involved.
Is the house/mortgage in both aunt and uncles's names? If so then I don't think you'll have any other options.

Yes, both of their names.

 

[lecach]

Deed in lieu is an option I think. Here are some details:

Deed in Lieu of Foreclosure
With a deed in lieu of foreclosure, you give your home to the lender (the "deed") in exchange for the lender canceling the loan. The lender promises not to initiate foreclosure proceedings, and to terminate any existing foreclosure proceedings. Be sure that the lender agrees, in writing, to forgive any deficiency (the amount of the loan that isn't covered by the sale proceeds) that remains after the house is sold.

Before the lender will accept a deed in lieu of foreclosure, it will probably require you to put your home on the market for a period of time (three months is typical). Banks would rather have you sell the house than have to sell it themselves.

Benefits to a deed in lieu. Many believe that a deed in lieu of foreclosure looks better on your credit report than does a foreclosure or bankruptcy. In addition, unlike in the short sale situation, you do not necessarily have to take responsibility for selling your house (you may end up simply handing over title and then letting the lender sell the house).

Disadvantages to a deed in lieu. There are several downfalls to a deed in lieu. As with short sales, you probably cannot get a deed in lieu if you have second or third mortgages, home equity loans, or tax liens against your property.

In addition, getting a lender to accept a deed in lieu of foreclosure is difficult these days. Many lenders want cash, not real estate -- especially if they own hundreds of other foreclosed properties. On the other hand, the bank might think it better to accept a deed in lieu rather than incur foreclosure expenses.

Beware of tax consequences. As with short sales, a deed in lieu may generate unwelcome taxable income based on the amount of your "forgiven debt."

 

[Sadie22]

First you need to get all the paperwork together. I would advise seeing an elder care/estate planning attorney before a financial planner. An elder care attorney would be aware of all of the possible options for your aunt.

 

[seashoreCM]

Do you have a complete list of her assets (bank accounts, jewelry, car, etc.)?

You might write down the various scenarios you have in mind, preferably briefly. Include the idea of "giving the keys to the bank". (Technically this is the "deed in lieu of foreclosure" and involves more than simply handing the keys to a bank official.) I think you don't have to hurry to a financial planner.

In most states there are limits to how much of wages can be garnished. So although your aunt may have to pay back the deficiency, it might be only a few dollars a week.

Propose bankruptcy (put the card on the table before the bank even if you are really not going to go through with it). This may induce the mortgage holding bank to cut you a deal.

Over 99% of home mortgages are held by distant companies which may be pension funds or insurance companies or federal agencies like Fannie Mae or even banks in other states. While you might be "handing the keys over" to someone in a bank's office downtown, the actual negotiations will be done by the real mortgage holder and will take time.

Just me, but I would strongly recommend that no family member throw money her way. No helping her make payments. She should use up her assets herself first even though that means less to pay off the mortgage with. And, teetering on bankruptcy, she will even have a good chance to wheel and deal with the IRS should a forgiveness of indebtedness 1099 form come along. Other family members naming her as a beneficiary of their IRA or life insurance policy etc. may choose to rename someone else as beneficiary (if possible) until this situation is fully resolved.

She should not move out (and perhaps pay rent elsewhere) until forced out, either punctually enough to close on a sale of the house or allow her rental tenant to move in or to smoothly complete a deed in lieu of foreclosure (hand over the house as well as the keys), or just in time to beat the sheriff in an eviction after a real foreclosure.

If it is absolutely clear she won't be able to live there for good and no relative can or wants to cut a deal to buy off the mortgage holder at a discount, then you can start now to throw away trash, give away small items, and/or move out larger items to relatives' homes for storage.

Psst! Her going to Disney prior to any settlements will not be considered fraudulent or a criminal act even though it leaves less to pay the mortgage, etc. with and exposes her to applying for food stamps down the road.

 

[eliza61]

I don't believe life insurance is a part of the estate? That is money that goes to an individual, not added to the assets of the deceased. At least that's how it worked for the few situations in which I've been involved.
Is the house/mortgage in both aunt and uncles's names? If so then I don't think you'll have any other options.

I was going to ask about that. When my mom died, my dad got her life insurance check and flatly refused to pay her credit card bills. The were polar opposites on consumer debt. My mom was a shopoholic and my dad was a cash only man. All the cards were in my moms name. He simply told them that she had died and there was no estate to collect from.

Op my prayers to you and your aunt.

 

[PrincessSuzanne]

Check with the mortgage company, she may be paying a small mortgage insurance policy that will pay off the remainder owed on the house due to the death of the spouse. That coverage was automatically built into our mortgage and if one or the other of us dies, it will pay off the house, and only leave the insurance and taxes, which in AL are minimal.

Suzanne

 

[PrincessDadx2]

Everything depends on the specific circumstances

Was she the beneficiary of the life insurance or was it in his name and thus pass to his estate? If it went to her, it is hers no strings attached. If it went to his estate then it is subject to his creditors.

Is she in a non recourse state? In a few states (9 I believe) any 1st mortgage that was used to purchase a property is non recourse. You can turn the house back and the lender can not sue you for any deficiency. If you mortage lender has recourse or if you refinanced and bought a boat/car etc. then you are generally on your own.

You say she can't pay her bills. Does she have a job or Social Security? In that case she needs to realize that her credit just got trashed and she is not going to keep her legal and moral obligations to pay the debts.

In that case I would advise her to stop paying all debts. Make sure she has money to pay for food, utilities, health insurance, and a car/transportation. She should stay in the house until evicted, which may take 1 year+ and try to complete a short sale. Principal homeowners have been given by Congress forgiveness of their mortgage debt forgiveness income the last few years, so I would not worry about that now.

Save as much money as possible until the short sale is complete or until evicted. Then use the money to get a small apartment that is in budget or move in with a family member. May have to pre pay several months because of bad credit, but that is what the cash savings is for.

Then I would go through the other debts on a case by case basis and use the leftover cash to settle each one for pennies on the dollar. Anyone who does not cooperate gets $0.

I would not waste the money to enter bankruptcy until someone forces her into it. That would require suing, getting a judgement, and trying to garnish her wages. You can't garnish social security, so most collections will not bother with her if she is truly broke.

 

[AmberHeartsDisney]

If she cant afford the house on her own she should try to sell ASAP and stop paying the mortgage. If she is already under water in sure it be to hard to catch up.

At least then she can save what money she does have and try to find a new cheaper place to live.

 

[lost*in*cyberspace]

we have to maintain the mortgage on her home (house was in her name) until it can be sold, because the mortgage company is considered a creditor, and they must legally be paid with proceeds from life insurance policies, etc.

This is completely wrong. Money received by your aunt from a life insurance policy is not part of the estate and cannot be garnished for paying estate debt.

 

[Monknmom]

We just bought the house in NY and you have to have PMI (principal mortgage insurance) until you have at least 20% equity into your house. You might want to check that and also see if she had any money in the equity account that was unused! I hope that this helps a little and Good luck with everything!

 

[rnorwo1]

Psst! Her going to Disney prior to any settlements will not be considered fraudulent or a criminal act even though it leaves less to pay the mortgage, etc. with and exposes her to applying for food stamps down the road.

Wow, thanks for all the info... I do not know what the laws are for Louisiana, but I've written all of these ideas down and will be better prepared when we meet with the attorney, hopefully next week. I am going to call each of the credit cards/banks and see if they will settle and/or discharge the debts and I'll definitely call the mortgage co. She does not think she has credit life on the mortgage, but definitely worth the effort to ask.

From what I've found online, even though she was the beneficiary, it seems like only $10k of the life insurance is protected from debt, even the debt that was only in his name. Again, I'm going to ask the attorney to confirm, but I'm afraid that may be correct for LA.

I've poured through their credit reports and have a more accurate picture of what they owe, and I feel a bit better about getting most of them paid off (if they'll settle some of it), so the mortgage is the only big worry. We have a large family so she'll be ok regardless, she can live with someone, but she's relatively young (61) so I know that's not what she wants to do. I am fine with her credit being wrecked, hopefully that will prevent her from ever touching a credit card or loan again!!!

Thanks so much for all the responses, I feel better that there are some options!

 

[dhardawa]

Definitely talk to an estate planning attorney. They will know all the estate laws for your state.

Reading this makes me really happy I paid the $3750 to have a trust set up for my kids. What a mess!