Divorced and under a pile of debt

In the midst of a divorce and unable to afford her Torrance home, Nicole Rasmussen phoned her lender to ask for a mortgage modification.

She phoned every week for more than a year.

She also called her congressman and a senator to seek their help. Then, in desperation, she and her ex-husband — who still jointly owned the home — stopped making the payments on their $475,000 mortgage.

It was the only way, she felt, that the bank would seriously consider her pleas for a modification.

“I didn’t know what was going to happen,” said Rasmussen, who was frightened that she and her 7-year-old daughter would be forced out of the home. “We were living in limbo.”

The risk paid off. Several weeks ago Rasmussen finalized the loan modification on the three-bedroom, 1950s ranch-style house.

Grateful to be at home for the holidays, she now looks forward to trimming the three artificial Christmas trees in the house and baking snickerdoodle cookies with her daughter.

But the mortgage mess and divorce have rocked her finances.

Like millions of other Americans, Rasmussen, 38, is facing an uncertain financial future, even with the loan modification. The only thing that’s certain this holiday season is that she will have to change her financial life.

She has already started. To make the mortgage payments more manageable Rasmussen took in a roommate. She also succeeded in getting the property reassessed, resulting in a lower tax bill.

And there were smaller steps — raising the deductible on her auto insurance and canceling her Costco membership.

But there are often reminders that, though she makes a very good salary, her financial picture has changed. For example, not only was she refused when she applied for a new credit card, but a card she already had was frozen.

On her own for the first time in more than a decade, Rasmussen has to navi-

gate her finances while balancing a tenuous mixture of income, debt and assets that could all too easily unravel.

“I have a general idea of what to do, but I don’t know for sure what to do,” Rasmussen said.

She wants to save for emergencies and retirement and pay down her debt, but she also wants to have enough money to splurge occasionally on theater tickets and attend out-of-town artist workshops to indulge her passion for mixed-media collages.

And she wants to be able to pay a portion of college costs for her daughter, who is so academically minded that she does multiplication problems at home for fun.

Certified financial planner Dirk Huybrechts reviewed Rasmussen’s financial details and drew up a plan for her.

Rasmussen makes $75,600 a year as a workers’ compensation claims analyst for a Torrance-based insurer. She also gets $300 a month in spousal support from her ex-husband.

She has nearly $15,500 in savings and stock holdings, plus another $60,000 in retirement savings.

Finally, she and her ex-husband jointly have $20,000 set aside for improvements and repairs on the house that they still own together. (He lives elsewhere and does not contribute to the mortgage payments).

As for debt, the new terms of the mortgage require a monthly payment of $2,260. She is also making payments on $60,000 that came out of a home equity credit line.

In addition, she has $11,000 in credit card debt and $7,500 left on a car loan.

Saving for the future has given Rasmussen comfort, and she’s ahead of her peers when it comes to putting money away for retirement. She has put retirement savings in nearly 40 different accounts established over the years.

“I have a vicious need to plan,” she said. “If you don’t have a plan, suddenly 20 years are gone and you don’t know where they went.”

Growing up in Beaverton, Ore., Rasmussen said she watched her mother labor to provide for the family.

“I didn’t want to struggle like my mom,” she said.

But saving when you have pressing debt — and having those savings spread among so many accounts — can be counterproductive.

“I don’t think I’ve ever seen anyone who has so many funds based on the value of their holdings,” said Huybrechts, who is with HFM Advisors in Brentwood. “She’s probably getting killed on fees.”

He suggested that she consolidate her accounts into eight or so low-fee mutual funds and reallocate her retirement savings into a split of 60% stocks and 40% bonds.

For the near term, Huybrechts said, Rasmussen should stop saving so much and channel more of her income into paying down debt.

“She needs to focus on things that are important,” Huybrechts said. “She’s scattered in her effort to save and lost sight of the impact of her debt and her overhead.”

She should start by paying off the credit card with the highest interest.

“There’s no point in sitting on $6,500 credit card debt with 11% interest,” he said, especially when the account is frozen and unusable.

If she increases her payments on the debt by $200 a month, she’ll pay it off in 14 months, he estimated. Then she can start putting additional money toward her other card and car loan.

Meanwhile, Huybrechts said Rasmussen needs to tighten up her budget, nixing annual passes and memberships, and avoiding splurges.

Rasmussen was amenable to the planner’s suggestions. But there was one expense she was loath to give up: her $280 annual pass to Disneyland.

At least that was down from her more flush days, when she took trips to visit every Disney park in the world.

Then there is the question of the house.

She and her now-ex-husband bought it five years ago by paying 20% down and taking out a loan for $605,000. The $60,000 that came out of the home equity line went mostly toward a kitchen remodel.

Huybrechts had two words for the house: sell it.

It might not be easy in this ailing real estate market, but the $20,000 set aside for home repairs could be used to sweeten a deal with a prospective buyer, or for improvements to make the home more saleable.

Huybrechts is aware that by selling now, Rasmussen would not make back the money she and her ex-husband put into the house in payments and improvements.

“She’d be lucky to sell the house for what she owes on it, plus expenses,” he said. “The idea would be to sell it and break even.”

But owning the house comes with expenses — mortgage, taxes, insurance — that give little room to adjust her overhead when needed. If she loses her job or even just her roommate, she could be back in arrears quickly.

“She can’t do anything with her fixed housing costs as long as she owns the house,” he said.

If the house sells, she should move into an apartment, even if the monthly rent is about the same as what she now pays toward the mortgage, he said.

The relative flexibility of renting would allow her to downsize, if need be, in the future. Meanwhile, she could concentrate on paying down her debt and rebuilding her credit. Eventually she could buy a more affordable home.

But after all she has gone through, Rasmussen says leaving the house might be too much for her, emotionally. She put a lot of herself into it, particularly in the kitchen remodel, and did a lot of the work herself, including installing the cork flooring.

“All of it was my choice,” she said. “It’s very me.”

She knows, however, that eventually she’ll probably have to let go.

“It’s a home and it’s security,” she said. “But it won’t be the place my daughter comes home to when she’s in college.”

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