THE MORALITY OF SHORT SALES AND WALK-AWAY FORECLOSURES

I have been involved in many conversations recently with Realtors and others about the failure of many homeowners to take responsibility for the debt they have incurred during prior years of “go-go” credit. These conversations have encompassed not only mortgage loan debt but credit card debt as well.

I attended a seminar last week at which a self proclaimed bankruptcy expert encouraged people to engage his law firm to renegotiate all their debt, not on the basis of personal financial need or crisis, but because, in his view, bankruptcy is now a socially acceptable way to avoid repayment of legitimate debt. Debtors, in his words, would be foolish to continue to pay down debt from which they could walk away via bankruptcy or foreclosure.

In contrast to that extremely irresponsible position, I have also heard more than one Realtor state that they will not participate in the short sale process because they believe that it is morally wrong for anyone to walk away from their personal financial responsibilities, regardless of the circumstances.

As with most emotionally charged issues, these two extreme viewpoints should be tempered with logic and a look at the big picture. Each individual must deal with his own sense of what is morally right and wrong, but there is no question that mass adoption of the concept that to walk away from one’s debts is not only OK, but socially acceptable as well, would create an even worse financial crisis than the one we have now.

What some of the proponents of “easy debt eradication” overlook is that each time a new law or government program makes it easier for debtors to walk away, such programs also create a disincentive for banks to lend, and the credit markets further tighten. These programs, if abused or overused, also result in the continued devaluation of everyone’s assets.

On the other hand, the short sale process and debt re-structuring programs are absolutely necessary to stabilize the financial and housing markets. Without them, the backlog of housing inventory would continue to grow and the economy would continue to decline. Used properly, these programs can contribute to the overall good and hasten economic recovery.

This issue brings to mind the old Chinese proverb which advises, “Moderation in all things.” As always, common sense and a reasonable perspective on personal responsibility should be engaged.