So many times when I meet homeowners in debt stress, the first thing they say is they intend to keep their house – come hell or high water. “Find us a solution Ross, but we insist on tying your hands behind your back in the process.”
In some cases, it’s actually quite doable. If, after we reduce or eliminate your debts, your cash flow is strong enough to carry your home, and there is equity in there, then go for it.
But in many cases, people simply won’t accept the music has stopped playing, and it’s time to let go and either buy something more affordable or move into a rental. Or if the situation is dire enough, move in with family or friends until you can reestablish yourselves.
Here are some real life examples from my client base this year:
An 85 year old couple, living in the Durham region, with a first, second and third mortgage on their property. In addition, they owe $45,000 in credit card debt. They are technically insolvent, as there is very little equity in their home. The three mortgages are costing a fortune every month (high interest rates) and every year the second and third mortgages renew, they are faced with high renewal fees (thousands of $) from their private lenders.
The good news is they have respectable income – CPP, OAS, and a modest company pension. But it’s never enough because of their high monthly housing costs. The husband seems to spend most of his waking hours scouring the internet looking for new lenders who might offer better mortgage terms. He’d be far better off finding a rental apartment or townhouse and giving up on their home.
An intelligent, hard working Scarborough couple who have poured all their resources into his flagging business. Sales and profits have plummeted over the past few years, and they racked up over $200,000 in unsecured debt – against equity of only $70,000 in the family home.
I helped them into consumer proposals on very reasonable terms, and for the moment they are quite happy with the relief from $5,000+ per month in minimum credit card payments.
But I fear their happiness will be short lived, since they have not cut to the root of their problem. They will continue to run his business, only now they no longer have credit facilities to shore up their monthly deficits. I think they will be back within a year with their backs truly against the wall. And if they wait too long, they may lose their house.
I would like to see them sell their house; park the equity; close (or sell) the business, and both secure regular full time employment.
Another family I work with were duped into a complex multi-level marketing scam a few years back. In fact the case is quite famous, as the fraudster bilked millions from hard working innocent folks like my clients. We decided personal bankruptcy was their only option.
Within their debt load was a $150,000 loan from a distant relative, secured by their home. As a result, there is no equity in their home. In fact, were they to sell the house, pay the commissions, mortgage penalties and legal fees, they would be short around $40,000.
The way around that was to include their house in the bankruptcy process – that way they could walk away from the $40,000 shortfall. In fact they could probably orchestrate as much as six months of free living in the house before they would be forced to leave.
But no, they felt terrible about the $150,000 loan, and decided to hold on and sell the house in the summer when the market would be more receptive to a higher selling price.
This noble act would result in more money for their relative than if the house simply went power of sale. “It’s the right thing to do Ross.”
That maybe true, but I tend to think at times like this you must go into Survivor Mode, & put your family’s needs first. Because they refused to walk away from their house, they will be stuck at least $40,000 as soon as they complete their bankruptcy. And they cannot include this debt in their bankruptcy after the fact. Also, their monthly nut to carry the house is beyond their means, so they are still experiencing the stress associated with spending more than they make.
I have many more similar stories – but I will save these for another day. The point of this article is that if you are truly going to address your debt problem and your cash flow problems, there should be no sacred cows in your analysis. Do whatever you have to do to get out of your mess and give yourself the best chance at a rebuild.
[notice]Ross Taylor is a credit specialist and mortgage agent who blogs frequently at ASKROSS. If you have any questions about anything financial, send him an email at email@example.com, he answers everyone.[/notice]