The law is rapidly changing in this area.
This outline was current as o/November 19,2010.
Options for Defaulting Property Owners:
The Legal and Tax Consequences
Terry M. Mallery, Esq.
Kristin DeMaria, Esq.
Mallery & DeMaria, PC
Attorneys at Law
215 West Franklin Street, Fifth Floor
Monterey, CA 93940
Entering the third year of the depressed real estate market, we continue to see homes,
apartments and commercial properties become "distressed properties", either because the value of the
property is less than the secured debt, or because the owner can no longer make the payments.
Property owners are looking for ways to get out from under the debt that only a few years ago seemed
manageable, when they asswned that real estate prices would continue to rise indefinitely.
The purpose of this outline, and the presentation intended to go with it, is to carefully
consider the options available to the property owner whose equity has declined or evaporated
altogether and/or who cannot continue making the loan payments according to the terms of the
loan documents. This outline should not be construed as legal advice or a representation of fact
or law by the attorneys who prepared it. Specific legal advice and consultation with an attorney
and a certified public accountant is necessary to apply the real estate law and tax law to your
What Are the Options? The options for dealing with rising payments and/or declining
value, and the legal and tax consequences to a property owner of selecting or allowing one of those
options to occur, are discussed below. The possible responses by the owner include the following,
roughly in order of the extent of possible adverse consequences associated with that choice:
1) "Stay the course" - continue making payments on all loans, as agreed
2) Renegotiate some or all loan terms (a loan modification, or "loan mod")
3) Refinance the loan or loans, possibly in a "short refi"
4) Attempt a "Short Sale" of the property
5) Give the lender a "Deed in Lieu" of foreclosure
6) Stop making payments and allow a foreclosure on one or more of the loans
7) File for bankruptcy law protection. .