Debt Plan – Facing Bankruptcy & Foreclosure

by · 34 comments

Have a question of your own?  Ask Matt Jabs for free!  🙂

Should Julianna let her homes go into foreclosure?

DFA Reader Julianna asked:

We are guilt-ridden and full of shame that we have allowed ourselves to get caught up in this lethal debt trap.  Unwise use of credit cards when income diminished due to income drop.  This month we had $1900 income with $7K in debt payments:

$300K unsecured debt, 2 mortgages (one rented) while waiting to sell, 2 auto loans $5K remaining on one and $20K on the other; $24K student loans.  Income drastically reduced due to medical crisis for me; husband employed in real estate, 100% commission based.  RE market is dreadful here.

Against our better judgment, met with bankruptcy attorney and were advised we make too much money to file.  He said only way is to let both homes get foreclosed, give up one vehicle, and find a rental house $700/mo (IRS allowable guideline) As strong Christians, we do not believe bankruptcy is the way.  We want to pay our debts, and have now contacted Consumer Credit.  The repayment plan would reduce interest rates and lock fees, but we aren’t certain if we can meet the minimum payments.  I’m scared of being homeless!  I’ve been reading everything I can — and realize we need an emergency fund right away — but with what?  We are in survival mode.  Please pray for us and give any advice God lays on your heart.  Thank you in advance.  God bless.

Debt and shame

This is an extraordinarily difficult situation, but there is hope.  Release your feelings of guilt and shame.  They will not help you; a firm commitment to paying back what you borrowed will.  That being said, the task ahead of you is neither small nor easy.  You will need to live far below your means in payment for living above.  The process will be all the harder if well intentioned people foolishly say you “deserve to live a little.”  Ignore them, and continue to do what you know is right… and you can do this.

Although this situation is difficult, the way out is no secret.  The principles of sound financial management are the same no matter what amount you are working with:

  • Spend less than you earn and save the surplus.

Here is my recommendation for how to deal with your situation.

Create a Written Budget

This MUST be your first step, your budget is your map.  Without a written budget, it is impossible to know what you have or where you are going.  This is especially crucial because of the variable nature of your husband’s income.  To calculate your monthly income, use his net income from last year (be conservative) and divide by 12.  Never spend more than that in a month, even when you have more.  When creating your budget, follow this simple rule:

  • Give 10% – Save 10% – Live on 80%

Realize that somewhere out there a family is living off 80% of your income.  It is important, as a Christian, that you not neglect your giving when in financial difficulty.  The 10% you save will be used to start building a $1,000 emergency fund (a larger cash reserve only makes your creditors more likely to sue for payment.)  With every check that comes in, before you do anything else, write a check for 10% for giving, and place 10% into a savings account.  When setting up the rest of your budget, eliminate every monthly bill you can: cable, magazines, cell plans etc.  Small bills add up.  Assess the difference between wants and needs and get down to the basics of food, transportation for employment, and shelter.  The excess will go towards freedom from debt.

Debt Reduction

Once your budget is in place, you need to eliminate all the debt you can.  First step is to cut up all the cards.  This prevents you from going deeper into debt slavery.  Next, eliminate as many debts as possible.  Return anything you still can that was bought with credit.  Those that you cannot return try to sell for enough to pay it off.  Try Craig’sList, a garage sale, and friends/church/family.  Finally, do not limit yourself to things you still owe on.  Anything of value you can do without should be sold.  Your goal is to reduce the amount of debt you will have to pay off with earned income.

Downsize Your Vehicles

The car you still owe $20,000 on needs to go.  Try to sell it for enough to eliminate the debt, and adjust your lifestyle to having one vehicle.  The one you owe $5,000 on is another matter.  If you can sell it for enough to cover the debt, you should, but you may already owe twice as much as it is still worth.  If this is the case, make paying off the vehicle your priority.  If your husband’s job allows, consider going car-less for some time and using bicycles or public transportation.

Evaluate Your Housing Situation

You say you have one house rented pending sale.  I hope that it will sell soon.  Add up the total ownership cost of your current home (mortgage, PMI, insurance, utilities, maintenance, etc.).  If the total is more than 35% of your husband’s net income, or more than 40% of gross, the house is more than can be afforded.  Place the home on the market, and begin the search for an apartment that meets the above guidelines.  It may be smaller, but you will feel better knowing that all the bills can be paid.

Final Details

Remember when paying your bills to take care of the important stuff first.  Give, save, pay for your housing, buy food, and spend the money needed to keep your husband working.  Do not spend the money for these things on unsecured debts.  If you are late paying an unsecured debt, the worst-case scenario is a line on your credit report.  That is ok as long as you have a place to live.  Meet your needs, and as you are able, begin paying on the highest interest debt first.  If a consumer credit agency can work out a payment plan, that is a good option.  Stay focused, stay the course, and one day sooner than you think, you can be debt-free without having to go through bankruptcy.

Do you have any advice for Julianna?

Have something to add?  Please share your wisdom and experience and help point Julianna in the right direction.  Thanks!

Have a question of your own?  Ask Matt Jabs for free!  :)

We accept no liability whatsoever for any loss or damage of any kind arising out of the use of all or any part of this material. Our comments are an expression of opinion. While we believe our statements to be true, they always depend on the reliability of our own credible sources. Any advice taken from this site does not in any way establish a client/adviser relationship.  We always recommend that you consult with a licensed, qualified professional before making any financial or investment decisions.

Betterment is one of my two favorite ways to earn interest on my savings! They have an awesome program for the Average Joe to save and invest simply and effectively. There are no minimum balance requirements and no transaction fees. Read my Betterment Review or open an account to get started earning now.

1 FernWise

I’d say that they have to move into lower-cost housing, no matter what. Clearly they are paying more than $740 per month on this home-related costs now, if they were already told to find a place for $700 a month ($1900 being this month’s income). I understand that the $1900 income is for a particularly slow sales month, but that is the basis they will have to build their budget around for now.

But, depending on what state they are in, unsecured creditors CAN get liens on savings accounts and checking accounts, and I’ve seen them get them on bank accounts with balances far below $1000.

Clearly they need to increase their income. There isn’t any mention of if the wife has a job or if they have any children – I assume the letter was edited to fit better. If they have no children, the wife is going to have to have at least one job or a home business. A job or two might pay off faster than a home business, and be easier to handle during a move.

2 Robert Espe

No we did not edit the letter. Julianna indicates in her first paragraph that medical issues are the reason for the recent reduction in her income. Fortunately in most cases, one person who has time to take car of things at home can allow for more economic living that offsets the absence of income.

I often hear “earn more income” as advice given to people in financial difficulty. While more income might help this situation, I think it needs to be underscored that for many people, that may just not be possible, in this economy more than ever, and more importantly, problems like this never stem from a lack of income. Without correcting the root of the problem, more money can sometimes make things worse.

3 Matt Jabs

Robert is correct in regard to the “root of the problem.” That said, Fernwise raises a great point. IF the wife is able, she should DEFINITELY go get a j-o-b.

4 Robert Espe

Come on folks, you’ll hurt my feelings! Matt is the cartoonish gentleman in the white shirt and tie, I’m the piggy bank.

5 FernWise

Ah, but while your name is at the TOP of the article, there’s an “Ask Matt Jabs” banner just after the article, confusing the issue!

6 gn

$300K in unsecured debt? That’s a lot of debt to carry and pay off… Medical bills or something?

Put you and your family first (well, second, after God..). Don’t let money problems lead to something worse. Pray about it. Trust in Him.

7 Four Pillars

This answer seems to be a generic “how to improve your financial situation” type post rather than answering her question.

They have $7k in debt payments and only $1900 in income (which I’m assuming including rental income). They need to eat as well (I’m assuming).

I’m not sure why bankruptcy is not an option for them since their income is not even close to their debt payments.

If they really want to pay off all their debts then I think they have to look at selling both houses, renting a cheap apartment, selling off one car (as you suggest) and then hope that her medical condition improves so she can work again. They will need to regotiate their loans down in order to have any hope of paying them off.

I don’t even know if that plan is possible – are the houses underwater? How far?

I honestly think they should keep the bankruptcy option alive. Unless their income gets a LOT higher then I don’t see any hope.

8 Mike Piper

Agreed. Even if we ignore the debt, depending on where you live, $1,900 just might not get the job done, even if you’re super frugal.

Has the husband considered looking for a salaried position rather than a commissioned one?

If income doesn’t go up, I don’t see any realistic alternative to bankruptcy.

9 Matt Jabs

To this day, I’m still not sure if I could endorse bankruptcy… but I’m also not totally sure I could dismiss it as a possibility, especially in extreme situations like this. I suppose I would have to go through it before I ever knew for sure how I felt about it.

What I do know is this… I would not file bankruptcy unless there was no other feasible way out of the situation. Like 4P, Mike, and Robert mention, this couple needs to sell everything, start living like hermits, and do whatever they can to make more money.

10 Matt Jabs

Yeah, maybe I’ll have to change the banner to say, “Ask Us.” Or something similar. After all… I don’t want to be stealing Roberts thunder! 🙂

11 Mike

Robert’s first point is dead on – release the feeling of shame and guilt. Easier said than done, I realize, but the situation is what it is. You need to get past that and start figuring out a solution.

Have you talked to the creditor(s) for the $300K unsecured debt about your situation? They might be willing to give you a grace period or work out some kind of deal, particularly if there’s a chance of bankruptcy and them not getting paid.

And is there anything else your husband can do in the real estate market that might bring in some short-term money? Like take on extra work as a home appraiser or something along those lines? Try to think creatively about how he could use his knowledge and skills in the market in a different way than just selling houses, assuming that’s what he’s doing.

12 Matt Jabs

The common theme of earning more income is a must… I wish I knew more about their medical situation. Julianna… can you work?

13 BG

Bleeding nearly $5k a month ($60k/yr) !!

I think you need _professional_ advice — it doesn’t matter about budgets or anything else at this point. Your income is only 27% of your debt payments — no amount of budgeting will fix that.

Either you need to drastically increase your income immediately, or get all of your debt payments restructured somehow to be below your income minus food (which in all likely-hood would require some form of bankruptcy).

** I am not a lawyer **

14 Budgeting in the Fun Stuff

$1900 in income and $7000 a month in debt needs more help than living simply and frugally.

I completely agree they need to live on far less than they’ve been doing…hopefully they’ve figured that out. But, how can they make sure their houses sell? So many people are “trapped” right now simply since houses aren’t selling.

If she can work, she needs to get a job. In order to successfully pay off their debts and avoid bankruptcy, they need more than $1900 a month. Even if they rent for $700 a month, spend $150 a month in food, pay $250 a month for electricity and water and internet or whatever misc bill I may be overlooking (birth control, dog food, etc), and pay $100 a month for liability only car insurance, that equals $1200, leaving only $700 for debt repayment and and whatever “extra” expenses pop up (like a doctor’s visit or new tires or whatever). That is simply not enough for $7000 a month of debt. She needs a job or he needs to make more.

I’m not saying they should give up, but there has to be some way she can contribute to their monthly income and he can earn more. Petsitting, babysitting, walking dogs, working from home as a sales rep for online or tv companies, etc. They need a bigger shovel to help with debt reduction as well as following the good advice in the post.

15 Matt Jabs

Woosh… I’m overwhelmed just thinking about this situation!

16 Four Pillars (Mike)

I’m not a fan of bankruptcy as the “easy way out” but honestly – I don’t know if it matters what your opinion is about that – some holes are too deep to climb out of. That in my opinion is what bankruptcy for. This might be that situation.

Of course there could be a lot of other info we don’t know like maybe their usual income is higher than $1900 or maybe this month had an abnormally high debt repayment amount? Wishful thinking probably.

17 Matt Jabs

Bankruptcy definitely exists for a reason, and if any situation seemed like a good candidate… it may be this one. That said, I just have such a HUGE aversion to endorsing a bailout for irresponsible behavior. That is the stick in my craw.

18 Four Pillars (Mike)

Yup. But it is impossible to legislate the difference between irresponsible behaviour and genuine bad luck so bankruptcy has to be the same for both.

19 Matt Jabs

Yeah, I suppose since the legislation does not differentiate between causes… then at least our advice can. 🙂

Julianna: can you give us more information as to how the two of you let this happen? Was your situation caused mostly by genuine misfortune or irresponsibility?

20 FernWise

Let’s look at increasing income for the husband. Yes, the real estate market is AWFUL right now. Yes, banks are reluctant to make home loans. Yes, many folks are choosing to rent rather than buy/sell homes.

But some agents are making a living, even a good living still, and some aren’t. What ideas do we have to help him become an agent earning a good living? Especially ideas that Julianna might be able to help with even with health issues.

What things are the most successful agents in his area doing that he is not? What do their agencies’ web pages look like? Are they using PPC (pay per click) and/or banner ads on Google? Are they hooked into Google in a way that they come up when locals look for real estate pros? Where are their links going to and coming from? Do they have their own blogs to get business and links? Are they doing more open houses? Are they giving seminars on how to buy homes in this market?

They might want to check out sites like and read their FREE articles on marketing and use what they can from that (I haven’t a paid membership there, and get a lot of ideas from them).

I’ve also heard that some folks have had success starting and monitizing blogs that chronicle how they get out of debt….. [grin]

21 Matt Jabs

Staying solution oriented is definitely our best bet… thanks for the reminder. The family definitely needs to get spending under control, but the also definitely need to increase income… and the more they increase their income, the faster they can bring resolution to their situation.

Julianna, you can definitely earn money… even if you have health trouble. Like Fernwise said, one way to earn more is to start and monetize a blog about your Debt Free Adventure. 😉

22 Olivia

The fact that credit counseling (I assume this is a non profit group) is willing to take you on is a good sign. If they don’t think you can ever pay things back they won’t work with you. (We know someone that was turned down because they didn’t make enough.) The fact that they set up a payment plan is also very good and the lock in rates negotiated with those you owe is also good. Do as they recommend. Find cheaper digs. Cut back. If you want to be encouraged, look up “Living on a Dime”. These two ladies have been though quite a bit (including illness) and paid back quite a bit. You may also want to look over “Hillbilly Housewife”. Check out the emergency grocery list, not that you have to follow it to the letter, but just to see what is possible. I haven’t subscribed to the paid sections of their newsletters but still have gotten good info. For a non emergency, conservative approach you might want to look at the “Dollar Stretcher” archives. Tons of great ideas. All free, listed under categories. Then my favorite resource is the Tightwad Gazette. Maybe it’s the drawings. Maybe it’s that Amy covers a range of frugal practices, from fringe to mainstream. (Being a bohemian at heart I like fringe ideas.) Try snagging a copy through interlibrary loan.

A very important aspect to this is to know you are not alone. You are part of a body of believers. Ask your church friends to pray for you. Other people have been through similar experiences. Pray with your husband and keep commuication open. Rough times draw you together and mature you like nothing else. Well intentioned people may give advice you can’t follow, maybe some of this in my note won’t work for you, but as you seek to be faithful to Christ and honor him in what you do, He does direct your paths.

23 Anthony

I generally agree with advice given: spend less, earn more.

The quickest things to do are:

1. Call your creditors for the unsecured loans, tell them your situation, and ask them about options. Otherwise, they won’t be getting paid their money! It’s important to them to help you out.

2. Increase your rent on the rental house. Consider renting out rooms in your primary home.

3. I agree with everyone else. In your situation, there is no reason for 2 cars. Get rid of one of them; hopefully, for at least what you owe.

4. If you have a house, I’d assume that you have stuff in that house. Sell it all. You don’t need a couch, a TV, a DVD player, a kitchen table, a microwave… you don’t even *NEED* a bed, per se. Sell it all.

5. Talk with the student loan providers. Same thing as the creditors: Tell them your situation and see what they can work out.

Here’re some longer term things to do:

1. Sell both houses. I know you said this is difficult… but you may have to take a hit. Undervalue your house, if you have to. I wouldn’t bother with renting an apartment (once these two houses sell). Move in with a friend or family.

2. Get second and third jobs for both of you! I understand you have a medical condition and that might limit some things you can do. But it doesn’t limit everything you can do.

24 WR

Not enough information.

How much are the homes worth? What do you owe? what type of mortgages do you have?

Assuming these facts were omitted because the info is not pretty, you probably need to let go of the Real Estate. You should also probably try to liquidate as many of your assets as you can. Furniture, Electronics, Clothes, etc. Keep only the tings that matter. Pictures of your kids, That handmade pottery your daughter made, etc. If it has memories and is too big, Take lots of pictures of it and give it to a relative. You need to get to the bottom as painlessly and as quickly as you can. The longer you drag it on, the more pain & stress you have to deal with.

Simplifying your life is a process, and a good one. Forget about the stuff, get on firm financial footing and learn the lesson.

This could be the best thing that ever happened to you.


25 Jose│Christian Business

“This is an extraordinarily difficult situation, but there is hope. Release your feelings of guilt and shame. They will not help you; a firm commitment to paying back what you borrowed will.”

Thanks Robert.

This is quite difficult situation but many Christians emerged victorious from similar situations in their lives.

With God nothing is impossible.


26 Bankruptman

ATL needs to do a story about how many lawyers sustained through 20 hour per days and 300+ hour per months, how many partnerships crumbled due to the absence and stress related to lawyers trying to help save a company, how getting a car service to take you home at 4 a.m. is not a luxury but a must because the lawyer is so exhausted that she might not make it home if they chose to drive themselves, use a taxi or some form of public transportation.

27 Jil.B

Call the credit card companies and the loan companies for your student loans. They are not advertised but MOST student loans can be placed in forbearance (interest will still accrue, but no payment is due) due to financial hardship and for medical issues. Credit card companies can be surprisingly helpful, if you ask the right way. No sob stories, no excuses, just here is the situation (medical issues, etc.) and I was hoping to lower/suspend the monthly payments to be able to make ends meet. Yes, this will cost you more in the long run, but it may help you keep your heads above water in the meantime.

28 Joe

How about repentance before God?

If this couple is a pair of “strong” christians as they claim, they need to repent to God of their covetousness that the Bible calls idolatry. Sounds like they have reaped what they have sown and need the power of God to blow them out of their sin.

Not trying to be harsh.

29 vc

Consider getting 2 more attorney opinions – the first attorney’s opinion that you make too much to file at all sounds wrong. There are income limits for Chapter 7 but not for Chapter 13. Chapter 13 bankruptcy is a debt payment plan – depending on debt /income information may pay back a fraction or even the entire debt over a 3 or 5 year period. Many (including me, getting ready to file subsequent to a lawsuit) think Chapter 13 is superior to a typical debt repayment plan for very complicated situations such as yours where expert advice and guidance is needed. Some of the comments above were overly harsh, in my opinion, bankruptcy law serves a purpose and not everyone who files for bankruptcy is a fraud or “deserves it”.

30 Scott

If you are already facing foreclosure because of mortgage, it doesn’t necessarily mean you need to file for bankruptcy.

There are times when debts can deal with themselves. In many states, you can’t be sued by the company for the difference between your loan and the value of your property. This is what we call deficiency. Now if you can’t get sued for deficiency, you can’t really be driven into bankruptcy just because of foreclosure.

There are a lot of debtors who, aside from their mortgage, are otherwise in good financial status. They can even avoid bankruptcy if they walk away from their mortgage. You have to be careful about using Chapter 7 as a remedy, since it is only every 8 years that you can invoke this to discharge you from your debts.
if you do not have that big a debt and you have enough cash, better pay off your credit card debts. You can even avail of discounts when you do this. But again, always be on the lookout for hoax debt-settlement packages.
The main point is that you don’t have to file for bankruptcy when you are in the brink of foreclosure. If you’re not facing deficiency judgment, take a look at alternatives before you consider filing.

31 Jerry

Sound advice. We tried selling our house a few years ago and was unsuccessful but we were able to rent it out. The rent covers our mortgage, taxes and insurance and that’s really all we could’ve hoped for at the time. We’ll try and sell again at some point. Downsize! Live simply! YOu can do it!

32 Gracemere House and Land Packages

Very informative information! The majority of people would like to find ways to keep their homes safe from the foreclosure sale. Furthermore, they may not desire to retain ownership of the property.Cha @

33 Kenshaww Jeanne

be careful here.nobody can help you here or even suggest how you can get financial help.any answer of a loan lender to your question,you MUST ignore,because they are SCAMS…real SCAMS…i was a victim of which i was ripped hundreds of dollars….so email me rightaway via ” “,i can’t diclose anything here for fear of SCAMMERS,so do as instructed and you shall see the reality of it all

34 Consumer Advocate

Great advice. You would think schools would teach kids about the perils of debt rather than having them pile it on to attend higher education. And you would think kids would get out of school and work of their debt rather than continuing to pile it on shortly after leaving.

Previous post:

Next post: