Can a Homeowner in Foreclosure Lose Her Retirement Savings?

Question

Hello-

I'm in the process of doing a short sale for a homeowner who is upside down on her property and behind on payments.

She told me she has close to six-figures in her 401k and some annuity from a previous employer. She's stressed out that she's worried the bank will confiscate her retirement money because she's losing her home to foreclosure.

Anyone ever crossed this bridge before and know what the legal scoop is regarding this? Can her bank seize her retirement money since she's walking away from her mortgage committment?  Or is it off limits and she doesn't need to lose anymore sleep over it?

Anyone suggest where I could get these answers so I know in the future how to handle this with confidence and provide some peace of mind to my client?

Thank you for any help you can provide.

Regards,
GJames

Mitsu O'Riley · Answer

First step is to figure out if she wants to or even is able to keep her home. That is what the bank does. If she can keep it with her payments being lowered $200, then they can do a modification. I always to try to get the bank to agree that a short sale is the best option for the seller before getting too far along.

Glenn C · Answer

Oh, that Deed in Lieu! Deed in Lew really threw me a curve there for a minute John. :-).

Thanks for taking the time to answer my question Gentlemen.

Regards,
Glenn

John Andre · Answer

Thanks for the spell check David!  
Yes, that is what I was talking about. There are hoops to go through to make it happen, but can be done. My attorney has told some of my distressed investors to stop making payments, The bank will not even listen until it is a hard ship on them. A different way to think, but is being excepted in this economy.

Dave P. · Answer

John- I'm not familiar with Deed in Lew. Would that eliminate her short sale process I'm just getting started with?

I think he was referring to a deed in lieu of foreclosure. This is where the bank and the home owner agree that the collateral goes back to the bank and the debt is fully satisfied without any legal actions.

This would require agreement by both parties. From my experience, the loan servicers do not want to even talk about deed in lieu until a sale (or short sale) has at least been attempted.

Make sure you are working with an agent who knows what they are doing. The property should be able to be sold short with an agreement from the bank regarding their future collections actions (ideally, with an agreement stating that all debts are forgiven).

This is not a rare occurrence. Just my thoughts.

Glenn C · Answer

Thanks for everyone's responses.

She's in Michigan, she's 51, I believe, so not currently tapping into her annuity for any distribution. She has had to tap into her 401k twice to make her house payment and wants no more of that. Plus penalties and interest.

She has an interest only loan on this house for close to $200k that is now worth approx $150-$160k and less every day.

John- I'm not familiar with Deed in Lew. Would that eliminate her short sale process I'm just getting started with?

Jon H. So you're saying that once she hits 65 yrs old and collecting her retirement that the bank could actually take those funds then? That is, if the bank is still around?

I'll try to corral a local RE attorney about the legalities of this and try to get my answer with the free initial consultation intead of costing me $150hr I'd rather not spend right now for a million reasons.

I guess I still have some investigating to do with this.

Thanks everyone!

GJames

John Andre · Answer

What state is it in. States like Florida is so over whelmed with foreclosure, the banks, on most part, are not following up with the collection process for deficiencies. From the banks attorney, the banks are out so much they feel it will cost even more to go after someone that might not have anything to give. I do have a great attorney in Florida that can answer your questions. It is a cloud that will hang over their head, and only a RE attorney will put them at ease. Why not do a Deed in Lew?? Saves the bank a ton of money and the bank writes off when the keys are returned. Win-Win!

Jon Holdman · Answer

Jim's absolutely right, she needs a knowledgeable lawyer.

I'm not one.  This is just my understanding from my reading.

Generally, money in a 401k or an IRA cannot be seized to satisfy a judgment.  The distributions from the plan, however, can be taken as they are made.  So, they couldn't take the 401k itself, but once she starts taking then distributions, they could take those.

If the annuity is paying out right now, they could take that money.

They probably will consider all this money in making the decision to accept the short sale.

AFAIK, there's no time limit on a judgment.

Richard Warren · Answer

Generally speaking, retirement accounts are protected from creditor claims by Federal law.  There are exceptions, fraud being one of them.  If she were to be charged with mortgage fraud there is a possibility of having that money confiscated however remote that possibility may be.  If she is that concerned she should consult with a lawyer but I doubt that she has anything to worry about.

:cool:

Jim Doine · Answer

I would suggest contacting a good real estate attorney with a lot of foreclosure experience.I believe the laws vary state to state.  Jim