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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!
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