There’s No Escaping Credit Aftershock for Owner Who Chooses Foreclosure
Q I purchased a home in 1989 that eventually was turned into a rental. Real estate prices plummeted, and by 1995 the property was worth about $60,000 less than the loan amount and the house was in a shambles, thanks to some awful renters. I had had enough and decided to dispose of the property.
However, the bank refused to allow a short sale for less than the mortgage amount because my income was too high for me to be considered in a hardship situation.
I did not have the $60,000 to pay the difference and felt that I had no choice but to let the bank foreclose on the loan. My problem is that now I have a negative credit item on what otherwise is an impeccable credit report. When I tried to refinance my primary residence, I was told that I had to wait three years to get an attractive loan rate, or else pay higher interest rates. How do I get this item off my credit report so I don’t have to keep explaining it and have negative perceptions of my financial situation?
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A You say you had no choice but to allow the bank to foreclose? Sounds to me like you did, but decided the hassle of being a landlord outweighed the importance of honoring your obligation to the bank.
Nowhere in your letter do you say that ownership of this rental threatened your financial survival. In fact, you were comfortable enough that the bank wouldn’t consider a short sale, which allows you to sell a house for less than the mortgage amount. (Short sales typically result in a ding to your credit report too, but it’s usually not as serious as a foreclosure. You also can get a bill from the Internal Revenue Service on the difference between the short sale and the mortgage amount, because tax agencies consider that a forgiven debt and therefore taxable income.)
By law, you’re allowed to put a 100-word statement in your credit report explaining the foreclosure. Most creditors won’t bother to read it, and you’d still wind up explaining the situation when you try to get a loan.
Which, for the rest of us, is not a bad thing. Lenders need to know you’re the kind of person who would bail on a debt. If they weren’t able to identify you and charge you more, then the rest of us would have to pay to cover your risk. Those “negative perceptions” you’re complaining about are actually pretty clear-eyed.
Long-Term-Care Dilemma
Q I am an elder-law attorney who choked on your Sept. 19 column that suggested “soul-searching” before attempting to qualify for Medi-Cal to pay the high costs of nursing home care. Before you pass judgment on people who shift their assets to annuities in order to qualify, consider that in America we discriminate against people based upon the type of illness they suffer--chronic or acute.
Someone over 65 who suffers from an acute illness such as coronary artery disease or cancer can get his or her bills paid by Medicare and supplemental health insurance. Those with dementia or another chronic disease are essentially on their own. The cost of long-term care in a nursing home is not covered by Medicare or most insurance. In the 10 years that I have discussed Medi-Cal planning with nearly 5,000 attorneys, CPAs and financial planners, I have yet to see one of them take this “moral high ground” when it is their mom or dad facing near-bankruptcy because of nursing home costs.
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A The situation does seem unfair. But I’m not sure that artificially impoverishing oneself to qualify for Medi-Cal (or Medicaid, as it’s known in the rest of the country) is necessarily the answer.
Medi-Cal and Medicaid are not, to paraphrase the New York Supreme Court that cracked down on some Medicaid planning schemes, a middle-class inheritance-guarantee program. No, our elders should not face bankruptcy in their last years after a lifetime of saving and frugal living just because they have a chronic condition such as Alzheimer’s, Lou Gehrig’s or Parkinson’s. But neither should people who can pay their own way be free to have taxpayers pick up the tab, especially if the only goal is to pass on an inheritance to their kids.
Part of the answer may be more widespread use of long-term care insurance, which can cover the nursing home costs that other insurance doesn’t. Another part would be education, so people understand that Medicaid and Medi-Cal allow them to keep certain assets. As an elder-law attorney, you and your colleagues could do a great service by offering free advice and seminars to such people, who might not otherwise be able to afford an attorney to educate them.
You could also work to change the laws, if you believe them to be unfair. Our legislators have made the decision to cover some kinds of treatment and not others, probably because they believe taxpayers would balk at the cost of paying for everything. If you think those priorities should be changed, contact your legislators.
In the meantime, it is up to us to plan for our futures based on current law. It’s appropriate that we consider the moral dilemmas along with the financial ones. All of us should know our options, but we also have to search our hearts.
Liz Pulliam is a personal finance writer for The Times and a graduate of the certified financial planner training program at UC Irvine. She will answer questions submitted--or inspired--by readers on a variety of financial issues in this column. She regrets that she cannot respond personally to queries. Questions can be sent to her at liz.pulliam@latimes.com or mailed to her in care of Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053. For past Money Talk questions and answers, visit The Times’ Web site at https://www.latimes.com/moneytalk.
