Dealing with an unaffordable mortgage and a mountain of debt
Dear Liz: I earn net pay of $3,200 a month plus $500 a month from a second job. I can’t work overtime because it has been cut out in my first job and doesn’t exist in my second job. I also go to school full time and will graduate in June, so I don’t really have time to work another job. My mortgage is $1,900 a month on an interest-only loan. My utilities, credit card minimum payments and other expenses add up to more than I make. I had been getting by with overtime and paying one card with another, or paying utilities with a credit card. Today I had to resort to using a gift debit card to pay a bill. I also have a mountain of student loans, and I’m behind on them too. I’m about a month behind with three credit cards. I don’t want to file for bankruptcy. I really want to pay my bills, but I’m struggling and don’t know what to do. If I have the slightest financial emergency, I’m in trouble. Can you please tell me what I should do or direct me to someone who can help? I was trying desperately to protect my credit, but I seem to have ruined it.
Answer: You’re already in trouble. You have an unaffordable mortgage, a whopping pile of debt and you’ve defaulted on your credit cards and student loans. Your desire to pay your bills is irrelevant at this point: You’re in too deep.
You may be able to avoid bankruptcy if you find a job after graduation that substantially boosts your income. In the meantime, you could give yourself some wiggle room by getting a roommate to help pay the mortgage and talking to your lenders about economic hardship options. (You can learn more about these at the financial aid site FinAid.org; search for “Trouble Paying Debt.”)
Before you make deals with any lenders, though, you should talk to an experienced bankruptcy attorney (check the National Assn. of Consumer Bankruptcy Attorneys at https://www.nacba.org for referrals) about your situation. You don’t say how much you owe on credit cards, but if the minimum payments are eating up that much of your income, it’s probably tens of thousands of dollars. If your job prospects when you graduate aren’t sterling, you may never be able to pay off that debt. You won’t be able to erase the student loans in bankruptcy, but you might be able to get rid of the credit card debt.
In the future, you need to understand two things. One is that carrying any credit card balance is a recipe for disaster. You shouldn’t have charged more than you could afford to pay each month, since that allowed you to keep living a lifestyle that wasn’t sustainable. Anyone who can’t pay more than the minimum on a credit card is in serious trouble, and using one card to pay another is insane.
The other thing to remember is that mortgages aren’t good debt if you can’t afford the payments — and a payment that eats up half your take-home pay is the very definition of unaffordable. Another clue that you bought too much house is the interest-only mortgage. If you can’t afford to buy a house using a 30-year, fixed-rate mortgage, you can’t afford the house.
Your credit scores should be the least of your worries at this point. Go get some good counsel, consider your options and make a plan to deal with this mess. Once you’re on the other side, you can start rebuilding your finances and your credit.
Dear Liz: You say that retirement saving should always come first. What if I have no debt except a mortgage and am paying into retirement and college savings plans, but also choosing to accelerate my mortgage payments? I’m 40 and will pay off my mortgage in two years. I could probably do better by putting the extra principal payments into retirement funds, but psychologically it feels great to pay off the mortgage. I plan to accelerate my retirement saving after paying off the mortgage. What do you think?
Answer: There’s nothing wrong with paying down a mortgage as long as you’re saving enough for retirement and your other important financial goals.
The problem comes when people skimp on their retirement savings, thinking they can make up for lost time later. They typically can’t, and the longer they delay adequate contributions to their retirement, the more hopelessly behind they fall.
Liz Weston is the author of the upcoming book “The 10 Commandments of Money: Survive and Thrive in the New Economy.” Questions for possible inclusion in her column may be sent to 3940 Laurel Canyon, No. 238, Studio City, CA 91604 or via the “Contact Liz” form at asklizweston.com. Distributed by No More Red Inc.
