Some Serious Questions About Strategically Defaulting

Keith Jurow, a self-appointed financial guru on real estate who writes his own Housing Market Report for his website, the Minyanville, posted an article on Arpil 26, 2011, about strategic defaults. Jurow writes that according to Wikipedia, a strategic default is “the decision by a borrower to stop making payments on a debt despite having the financial ability to make the payments.” This definition, he says, has become the commonly accepted view. Jurow takes the definition a step further by defining strategic default as “any borrower who goes from never having missed a payment directly into a 90-day default.”

Jurow’s article about strategic defaults deals with the current housing crisis, and to illustrate his point, he uses charts from two important studies published by three Morgan Stanley analysts entitled “Understanding Strategic Defaults.” The gist of the article is that strategic defaults are on the rise, and the reason for the rise is an unethical attitude by the debtor to abide by the conditions of a contract.

To illustrate he uses a story from a Huffington Post article where a man, who was upside down on his mortgage loan, sought advice from an attorney, an accountant, and a doctor on what to do about his situation. All three expressed the same advice to him. They told him to walk away from the mortgage, save his money, and prepare to move to a rental unit.

The author was a little surprised that no one thought there was anything wrong with strategically defaulting. The attorney actually suggested that the defaulter file for bankruptcy to prevent the bank from going after a deficiency judgment for the remaining loan balance after the repossessed property was sold.

This dilemma raises some serious questions. Is it unethical to strategically default on a mortgage loan? Who put us in this situation where strategic defaults are on the rise, the debtors or the creditors?

First of all, it is interesting to note that Jurow quotes material from Morgan Stanley analysts to make his conclusions. Morgan Stanley is a global financial service that has had its fair share of controversies and lawsuits including a class action lawsuit for unfair labor practices, fraud, and a variety of other irregularities. The Stanley analysts coming to some ethical conclusion about debtors strategically defaulting is suspect at best.

Secondly, when Jurow gets into the ethics of whether a debtor should strategically default, he gets into my area of expertise. Since I hold a Masters Degree in Divinity, and I am a licensed and ordained minister of the gospel, I think I qualify to make comments on what is ethical. The Biblical adage of “don’t judge unless you are judged” certainly comes to my mind in the Huffington Post illustration. The 2011 Academy Award winning documentary, The Inside Job, eloquently points out in detail the fraud and corruption of the credit institutions, our government, and a list of other individuals whose actions contributed to the increase of strategic defaults from the housing crisis. When people have been offered a contract, it should be ethically based upon a promise of good faith to deliver such goods, but when one side or the other has lied about the environment surrounding the conditions of the contract, where is the good faith?

Lastly, the advice from the lawyer to file for bankruptcy to prevent the bank from going after a deficiency judgment for the remaining loan balance after the repossessed property was sold was good sound business advice. The advice has little to do with ethical issues but more to do with legal and business issues. It is your Constitutional right to file for bankruptcy protection. If doing so is a good business decision and it is legal, there is nothing unethical about the move.

There are ethical considerations which should be made prior to filing for bankruptcy. If your house goes upside down causing you to lose money in the future that will impact your child’s education fund, thus, preventing the child from receiving the education opportunities he could, you have an ethical obligation to the child as well as one contractually to your creditors. Nevertheless, these are academic arguments, and in light of the illuminations already presented by the history of the events, the cause of the current housing crisis was caused much more by the credit institutions than any number increase of debtors who strategically defaulted. In other words, the creditor’s actions provided the strategic defaulters ethical reasons for defaulting.

Maybe you are thinking of strategically defaulting and need information about filing bankruptcy. If so, you should consider consulting with a bankruptcy lawyer who can help you understand complex bankruptcy laws and how they apply in your particular situation. If this sounds like you, contact us at www.betterbankruptcy.com .We will help you find a bankruptcy attorney in your area that will help you with any questions you may have on bankruptcy law who can answer your bankruptcy questions.

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