Another Hardship Question

[Oh so SIMPLE]

Plan has safe harbor hardship definitions.

Employee presents from the mortgagee on her residence a 'Notice of Intent to Accelerate' under the promissory note, specifying the amount needed and the date by which needed in order to avoid acceleration. The notice also mentions that if acceleration occurs, then "foreclosure proceedings will be initiated at that time."

It looks to me that it would be premature at this time to base a hardship distribution on this notice.

Any comments?

[Guest Sieve]

I would agree. (Is that a comment, or a conclusion--or both?)

[masteff]

This is one that Sieve and I disagree on. You now have proof of default and intent to foreclose. It's been discussed on here before about how imminent must foreclosure be for the withdrawal to "prevent foreclosure". My thinking is the lender has now declared "pay us or we foreclose"; there is no latitude in the demand; it's absolute, not "maybe"; failure to pay the amount will result in foreclosure and that means a withdrawal at this time will prevent foreclosure.

Edit: added reading: http://www.lexisnexis.com/Community/reales...he-Mystery.aspx

[Guest Sieve]

Yes, we agreeably disagree.

I do concede, however, that prior communciations will help tell the tale, and the tone of this notice may be much more severe & threatneing--& specific--than the other 3 or 4 notices. But, if this is the first notice received (after missing only a second mortgage payment, for example), then I would be a bit more wary. Still, it's a judgment call, which ought to be consistently applied from participant to participant.

[Belgarath]

From the world's shortest lists:

People Who Are Interested In My Opinion.

But I'll give it anyway. I agree with Masteff. Conceding that I have no direct experience with an audit or enforcement action in such a particular situation, IMHO it seems unlikely that the IRS would deny hardship treatment in this situation. Has anyone actually seen such a situation, or heard of a case?

[Guest JM123]

Any thoughts about the situation in which a participant has fallen behind on payments and needs to take a hardship withdrawal in order to refinance and thereby avoid the inevitable foreclosure?

[ETA Consulting LLC]

Any thoughts about the situation in which a participant has fallen behind on payments and needs to take a hardship withdrawal in order to refinance and thereby avoid the inevitable foreclosure?

I think that is pushing it, but not inconceivable. There would need to be a substantiated fact pattern showing this is the case and there are no other alternatives available. It goes to how preemptive will you be in "Preventing" forclosure; so preemptive that there never was a realistic threat? If there is proven to be a significant risk of forclosure and the restructuring of the loan would prevent that, the there could be an argument to provide a hardship. Again, I would base it on the ability to document the severity.

Ultimately, the IRS agent will do a smell test. It may look bad, but in the end the question would be how bad does it smell.

[masteff]

and thereby avoid the inevitable foreclosure?

See my post above. You must have something to document that foreclosure is otherwise inevitable. Typically this is a demand letter of some type from the current mortgage company. The participant may need to call the mortgage company to request a letter, if for example one hasn't been sent due to forebearance during the refinancing.

[Guest JM123]

Thanks for the input!

I think the large administrators prefer to implement an "imminent threat" standard that's safe and inexpensive to administer. To me, it would seem that the exception should not require someone to go into default on their mortgage and and destroy their credit. I would expect that the rule would allow someone on schedule to be in default to refinance to affordable monthly payments rather than going into default.

If someone is not in default, I don't know that state laws even permit lenders to send a letter threatening foreclosure. What are others doing in this situation? I imagine this would be fairly common.

[Bill Presson]

Obviously, it's the Plan Administrator's (read Employer's) final decision, but if a participant has a letter from the mortgage company indicating "pay or we start the foreclosure process", we've always recommended approval.

We've also had some of them reviewed on audit by both IRS/DOL without any issue whatsoever.

I wouldn't do it without something in writing from the mortgage company, but I don't understand some of the harsh stances here. Just how close are you wanting people to get to foreclosure before "rescuing" them?

[masteff]

If someone is not in default, I don't know that state laws even permit lenders to send a letter threatening foreclosure. What are others doing in this situation? I imagine this would be fairly common.

At least a few years ago, if you were past due and called to request such a letter, they would generate it. I'd imagine there's a difference since it's being specifically requested by the borrower. Most mortgage cos will even fax it same day.

[Guest JM123]

We've also had some of them reviewed on audit by both IRS/DOL without any issue whatsoever.

I wouldn't do it without something in writing from the mortgage company, but I don't understand some of the harsh stances here. Just how close are you wanting people to get to foreclosure before "rescuing" them?

I agree. What we are seeing more of is participants wanting to refinance to reduce their monthly payments to an affordable level. Sometimes they need some cash to participate in a federal loan modification program; other times they need additional cash to qualify for refinancing because their properties are underwater.