Foreclosure carries a stigma in our society, as well it should - normally, if you let your property go into foreclosure, it's a sign of serious financial mismanagement. But these are not normal times...
However, some would go further to argue that you have a moral obligation to repay any loan, no matter the circumstances.
On the other hand, well respected businesses, including large corporations, default on debt all the time without the character of their boards being called into question. Often, these defaults happen even though the corporation has the cash to pay - they have simply calculated the fall out, and decided that it makes more business sense to let a property go back to the bank, rather than throw good money after bad.
Here's an article on the practice, known as "strategic default".
Personally, I'm trying to decide who's right - I know first hand how it feels to not be paid back, as my wife and I made several personal loans totaling tens of thousands of dollars to employees and friends when times were good... and we're likely never to see the majority of that money again.
On the other hand, when a bank charges you interest on a loan, part of that interest is paid because of the risk of default - if there were no risk, the rate would be the same as a treasury bill. So, the bank is taking the risk that you might default to make more money. If they make the mistake of loaning money at the wrong time and property values plummet... is that the borrower's or the bank's fault? Or is it just a risk of doing business? Should borrowers feel morally bound to repay the debt, or should they act like a business and make the choice that protects their own interests without regard to the bank?
I'd love to hear what other people think about what to do when "strategic default" is an option for individuals and businesses.
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a very complex issue indeed. A first thought is just because "Big business does it" does not make me feel good about defaulting on a loan. On the other hand, what realistic option do some individuals have when faced with catastrophic economic circumstances. But to me here's the key question to ask: did loan defaulters (whether they be individuals or corporations)over extend themselves without a realistic picture of the future? And what about those of us who didn't overextend themselves when times were good? Because we all know, it's us (the financially prudent) that will pay the price of loan defaults, NOT the banks...but good question to pose Mr. V!
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