Couple Can’t Make Credit Card Payments. What Would You Do?

by Neal Frankle, CFP ®

I took a tough call yesterday from a young couple who can’t make both their credit card and mortgage payments. It has to be one or the other. John and his wife Margaret are in way over their heads, and they’re considering throwing in the financial towel. They are facing bankruptcy and foreclosure.

They owe $50,000 in credit card debt and they can barely make the minimum payments. They fear losing their home and their credit score.

How they got there:

Both John and Margaret are hard-working people. They got caught when his employer (of 15 years) closed down. They piled on credit card debt to tide them over until John found new work. Strike 1.

At just about the same time, the credit card companies started jacking up their rates. So just when the family could least afford it, their expenses went through the roof. Now they are desperately trying to figure out how to get out of credit card debt fast. Strike 2.

Finally, the city they live in came under financial hardship and doubled the residents’ property tax. Strike 3.

Those were the three straws that broke the camel’s back. The only assets John and Margaret have are their home and John’s IRA. They have $200,000 in equity in the home and about $68,000 in the IRA account. That is their only savings.

Their income is barely enough to pay their basic living expenses. It is certainly not enough to cover their living expenses and the credit card bills.

The couple asked me about bankruptcy. I had to tell them upfront that I wasn’t the best person to consult with – that’s why I’m asking you for your input.

Having said that, here’s the advice I did provide:

A. Continue making property tax and mortgage payments. The home is the one asset they own that has some equity. They simply cannot afford to lose it.
B. Perform a postmortem on the credit card debt. How did they accumulate the debt? What could they have done differently to avoid falling into this trap?
C. Implement a drastic plan to cut expenses and increase income. I suggested that they go through every single expense and try very hard to find a way to do without. Also, I suggested they rent a room out in their house and find second jobs. They simply must create an emergency fund so that this problem does not repeat itself.
D. Renegotiate the debt with the credit card companies. I told John and Margaret to call the companies and inform them that they simply cannot make the payments. They should push the companies hard to make an arrangement. I believe that the couple should be able to get the companies to agree to an interest rate moratorium and even a principal reduction.

I did not suggest that the couple contact a debt consolidation or negotiation company because I was concerned about debt relief scams. Also, I was wondering what your experience has been.

What advice would you give John and Margaret? Are there companies that really do help people facing these hardships?

After you’ve considered these questions, please consider checking out these posts and carnivals. They are my favorites for the week.

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{ 23 comments… read them below or add one }

K February 26, 2010 at 8:43 PM

First, I suggest a harder look at spending habits. If they are truly down to the bone, I am a bankruptcy attorney, and I suggest bankruptcy. They would likely NOT lose the house in bankruptcy if they can keep up with the mortgage, insurance & taxes. They *might* lose the IRA – they have to consult with a bankruptcy attorney to figure that out. But the only thing you need credit for is a house or car loan. They have cars & a house, so what’s a hit on the credit going to do? Nothing.

I doubt they can sell the house – if the county is doing so badly that property taxes doubled, it does not sound like a seller’s market.


Merchant Accounts - Liz February 17, 2010 at 7:58 AM

Everyone here has given great advice, again not sure what state you are in. Is it possible to re finance their mortgage? Then possibly get some credit counseling so they don’t fall into this situation again.


Abigail February 7, 2010 at 11:37 PM

I’m a little surprised that *no one* seems to have thought about getting a HELOC. I know it’s a bad environment for it, and it won’t be easy. But if they ahve $200,000 of equity and only want to take out $55,000… It’s got to be significantly cheaper than the credit card payments.

Or would they not be able to make any payment whatsoever? I would think that second mortgage is a long-term enough to cut the costs down significantly.

If that doesn’t pan out, I’d say they need to fine all the side hustle they can. I’m assuming the husband’s working part-time or not at all. You didn’t really mention the details. Either way, if they want to save their house, they need to take in boarders and find extra work.

If they can’t do both of those things, they’re probably going to need to sell the house. If they can’t sell it… Well, I just think it’s better to leave the house and keep your IRA in tact than to save a house but start from scratch on retirement at this point in their lives. At the rate that they’re going, they’re not going to be able to replace that $68,000 in the near future. So they’ll actually pay about $55,000 for the privilege of raiding their retirement assets early (10% penalty for early withdrawal).

I understand that they don’t want to lose their house. It must be heartbreaking. But that is something concrete they can do now. Otherwise, they risk their future. And what if they borrow their IRA and things still don’t pick up? They could still lose their house anyway.

They should consider selling or renting the house. Ideally, they can share it with someone else. But since he hasn’t (I’m assuming) come back into a regular job in his field of work, they may need to consider moving anyway. Why not sell or rent out the house to cover the payments and try to use that to cover themselves in the meantime?

Also, did anyone mention to them going through and cleaning house? When we had to move, we were horrified by how much stuff we had and needed to get rid of. They were all small things, but they added up. We got about $250 for a late-in-the-season yard sale that started later than it should have. We ended up donating about $2,000 worth of items (being conservative about value).

They should get on Craigslist and eBay and start listing stuff. If they aren’t sure about any given item, they should ask themselves whether they’d rather have it or the house. Keep it or declare bankruptcy. Even if they don’t have any big toys, they might be able to make a dent in their credit card payments for a couple of months, if they keep selling things.

We never considered ourselves as having too much “extra.” But when we had to decide how to fit everything into a 10’x11’x12′ cube… Suddenly, we just weren’t as attached to our stuff. (And I’m a packrat, so that’s really saying something!)


Neal@Wealth Pilgrim February 8, 2010 at 6:13 AM

My bad….they have a HELOC already – the $200k equity in the home is AFTER the 1st and the HELOC. But it was a great thought.


Stephanie February 7, 2010 at 6:05 PM

I am sorry if my post came out hostle or rude, I just read it and it was very intense and I appologize ! I feel very strongly about the subject and I got a bit involved so I do appologize if I came on too strong, lol !! I obviously respect your opinion and would never want to act otherwise !!


Neal@WealthPilgrim February 8, 2010 at 8:47 AM

No apology required what-so-ever.

This is a very emotional issue – especially if you’ve gone through it before.

I think that selling the house is an option but not the first one. We would need more information first.

When I asked John about that idea, he told me that renting something (even much smaller) would cost them the same or more – they’ve lived in the home for many many years.

The home they currently own is a starter home so there is nowhere to “downsize” according to him.

Anyway, until they get spending in line with income, it won’t matter. They’ll experience the same thing you did – they’d fall right back into debt.

The first target has to be spending and income. After that, once that’s stable, we can look at selling the home if we still need to…. Maybe they should move altogether to a new state with better income options. They don’t earn all that much right now and that could be significant – down the road.

This is a tough one…granted. You or I would have other solutions but my sense is that John and Margaret really have to focus on what got them into this fix before we apply a solution.

I do appreciate your strong feelings but they were neither rude or too strong. Keep it up Pilgrim!~


Stephanie February 7, 2010 at 4:16 PM

I went back and reread your article so I could make sure I really understood what was going on.
I really feel, honestly , in that position, sellng the house is the only option. The taxes are doubled and they can barely pay thier expenses with the debt, selling the house seems like the most responsible thing to do. If you have a house with that much equity, nope, they will probably not let you file they will make you use that equity to pay off the debts. You have to tell them everything you own and the court has the right to force you to sell things to pay off the debt, a home with that much equity, they would not qualify for a bankrupcy probably, unless they were very behind on the house payments and then I am not sure how the court would handle it.
I think when we find ourselves in messes like that, even though it is not thier fault per se, they need to do what it takes to fix it . I understand the situation, we lost income but it was still our fault we took on too much debt,we had no one to blame but ourselves. Did they live above thier means during that time, or did they honestly watch every penny. We do not know that either. All that makes a differance too.
They have a lot of debt at 50 grand , it seems like a lot for just him being unemployed for a time. I think you were so right to advise them to figure out where they went wrong. They could have been eating out every week and spending like normal until thier credit ran out. That is a lot of credit card debt. We owed less than half of that when we filed. We had four kids and our income was down a lot. So I think you are right in assuming they might not have been spending wisely.
I think that selling the house is thier only option.
They would not get enough out of their IRA to pay the debt off anyway. Penalties and taxes would eat a good amount of it up and they only have 18 grand above the debts, so wiping that out would still not pay off the debt and then leave them with no retirement and no emergency fund.
Sometimes things happen that are not fair, and sometimes we have to make sacrifices and I think with that much equity they should sell the house, pay off the debt and put away an eight month emergency fund and then put the rest down on a house they can afford and move on. They would have enough even after paying debt off and putting away thier emergency fund to put a nice down on a house and should be fine, but they need to downsize if a job loss sends them spinning like that. What if it happens again and no emergency fund, IRA is gone , then what ??
I love our house, but if we had that kind of equity and were in that position it would be a no brainer. There are other houses. It is not worth my marriage and family and having a smaller house, and an emergency fund and keeping my retirement would give me more peace then doing what I have to to hang onto a house that maybe they just should not keep.
Just my opioion, for what it is worh. They are luck to have that option, many people are not that fortunate and they need to make very wise decisions at this point.


Stephanie February 7, 2010 at 9:38 AM

With all due respect,and I mean that, I am kind of suprised that you would think using an IRA is a wise solution to this couples problem even if it were a one time issue. I thought that touching retirement money is a big no no because that money is going to be needed at retirement and having years of growth is key to that ideal. That is a good size retirement acount for a young couple and if invested well could grow a lot before they retire, and when you have a good IRA balance you are more motivated to continue to add to it then you are if you have to start all over again.
I personally would never advise someone to do that myself, even if it did mean bankrupcy and a one time issue. With Social security so scary right now, we need to have all the money in our retirement accounts we can. Most of us have not saved as well as this young couple have, and it would be a shame to wipe that all out.
Also, if they are young as the title of the post suggests, wouldn’t they be subject to penalites and fees both on the federal and state level if they take it out to pay off debt ?
Respectfully, I am just very confused by your answer on this one ??!!


Neal February 7, 2010 at 2:48 PM


I’m really glad you take me to task. Good for you!

Using IRA money is always the last resort. The bankruptcy would actually cost them more because -as I understand it – they’d lose the house.

Yes, these people would be subject to tax and penalty if they used the IRA money and yes, it’s usually a very bad idea and one that should not be taken lightly.

As you may recall, I did not recommend using this money to pay the debt in this case. I suggested they go back to the creditors and negotiate and at the same time, take a hard look at every single expense they have with the goal of cutting beyond the pain point.

I don’t want these folks to touch their retirement assets for exactly the reasons you point out. But in some (very rare) cases, using the IRA money might be the least bad alternative. It depends on the situation.

I think that paying off ones debts, no matter how you do it, is better than walking away from them. I think that sticking it out and paying them off gives (especially a young couple) a healthy appreciation for money. Walking away from debts does not do that in many cases. At least, that’s my experience.


karyn February 6, 2010 at 5:09 PM

I’m not offering this as advice but I do have a question. If they cut a lot of their costs and still can’t make basic payments, wouldn’t it be better to use the IRA money to pay off at least some of the debt (assuming they’re not too close to retirement)? Isn’t the return on an IRA probably going to be much less than the interest rate on overdue credit card debt?


Neal February 6, 2010 at 5:54 PM

All things being equal this is great advice. My main concern is that, as I mention above, until they address the core issue of standard of living, they’ll just eat through the IRA and re-create the same problem.

So, if this were a one time issue, I’d recommend doing exactly what you bring light too…use the IRA money.


Infinion February 5, 2010 at 12:37 PM

With 200K in equity and 50k in debt, the answer seems pretty clear doesn’t it? Even if their home has lost some value and they take an emotional hit on what they get back out of it, if they truly have that much equity, then they have plenty to pay all their debt, plus likely reduce or eliminate their mortgage payments since any interest rate today is likely lower than what they currently have. They’re lucky; they have a way out. Most people you heard about now have negative equity and owe more that 50k.


Neal February 6, 2010 at 5:52 PM

The only problem with selling the house is they still have to live somewhere.

If they sell the house and downsize, they may not find anyone willing to give them a mortgage and the rent they would have to pay might be higher than the mortgage payment they make now.

Also,my concern is that unless and until they really address the standard of living issue, they’ll just eat up the equity in the new home too and continue this cycle of downsizing.


Stephanie February 6, 2010 at 8:38 PM

I have to say I do agree with you upon thinking about it. We went on to build up new debt within just a few years after the bankrupcy because we were trying to rebuild our credit. Yeah, that is what we told ourselves anyway. Bad habits and stupidity were more like it.
You are right that if they do not figure out what caused the overspending, they will repeat it. No doubt about it. I was only thinking of the quick fix. We have learned finally and have no credit cards except one of those old ones they reconfigured as a loan for us to pay off. It will be gone in the next year. We paid off the other two we had and cut them up a year ago last month. If felt good and we are determined to never use credit like that again. They closed us later for not using them, after cutting our limits, we laughed at both letters.
As far as having a place to live, there is no differance between that and renting out your primary residence and renting for a while, you can do it. I am sure they can find something especially if they pay off he debt and have money in the bank, that makes a huge differance. I just doubt that they will want to take thier life style down that far, most people would struggle with that. You can keep your house when you file bankrupcy and if they did that and erased the debt they could keep the house, but like you said, and we experienced , you are at risk of doing it again.
How would you propose they figure out the mispending before they go down that road yet again ???
I wish we had someone to help us back then but when we went to a family member who was a financial planner, he had no interest in helping us at all. He said, oh, you will be fine,without looking at any of our bills or income, and we filed for bankrupcy a few weeks later.
I wish we knew then, what we know now, but all we can do is move forward. Thanks for reminding me of the core issue, after all these years I had forgotten the part where we went in debt again. Like many bad things, we tend to forget and that is what causes the problem in the first place !!
This time however, we will not make that mistake again, it took us twice but we finally learned it !!


Matt Jabs February 5, 2010 at 10:59 AM

It will be hard for me to give better advice than you already have – you were spot on in my book.

Per the company question… it is imperative to distinguish between debt management companies and debt counseling companies. The former are usually for profit, will simply do the negotiating for you, pay each bill for you requiring only one payment to them, and take a cut in the process. The latter are usually not for profit and will focus first and foremost on educating and counseling free of charge. They also will usually have programs to help you settle your debt, but will encourage you to try it yourself first.

A few good resources are:

Greenpath Debt Solutions
National Foundation for Credit Counseling

Hope this helps!


Pam McCormick February 5, 2010 at 9:37 AM

I absolutely love all the advice given so far.May I add that going in “emergency mode or gazelle” whatever gets you to be considering things you would never think of before like sharing your house with another couple to split the house payment and utilities.Maybe car pool together (hubby and wife) if possible if not how about someone at work? can you pay gas and they give you a ride?My point is out of necessity we can get creative but achieve our goals.I wish all the luck and definitely hold tight to each other.


Neal February 5, 2010 at 12:02 PM

Yes…you make a good point Pam. Necessity is the Mother of Invention!


Stephanie February 5, 2010 at 8:59 AM

I am not sure I would have given the same advice you had. I do not know what state this is and how much housing is, but certainly for 200 grand they could have sold the other house and purchased a home cash and then paid off thier bills. No home is worth a marriage and not many people are blessed with that much equity to be able to even have that option. With a home paid for cash, they would have had a lot of income to put toward the bills and save money so that they can have an emergency fund. Some day after thier debt is completely gone and they have that six to eight month emergency fund they can sell the house if it is not what they reall ywant, and put that money down on the house they really want and that they can afford without stress.
I would not use the companies that help with debt and I am glad you do not advise that. Years ago we tried two differant ones and they only made things worse and took a ton of money from us. One did settle debts for a lot less so we still came out ahead, but I absolutely would never advise someone else make that same decision.
Most people do not want to cut thier standard of living and bankrupcy can be an easy answer, but having gone through it ourselves, I would do anything possible to avoid it. At the time we filed, our house could not be sold for what we owed, so we did not have an option to sell it and bull another home cash and in fact we lost ours in the bankrupcy. It was devestating and now that we are past the ten years it is easier, but that is not an option if you have that kind of equity.
I wish them luck, it is a hard place to be in, but at least they are blessed enough to have some options.


Neal February 5, 2010 at 12:01 PM


Again…great ideas……I am also not sure of the housing market in their home state.

One question….what were the most difficult aspects of filing for bankruptcy? How did it impact your lives afterwards?


Stephanie February 5, 2010 at 1:19 PM

A good question, how did the bankrupcy affect our lives afterwards ?
Losing our dream home was devestating . We had lived there five years after renting our first 13 years married, and thought we would live in it forever. Three and a half years later however, we were able to buy another home in another state, moving from expensive Calif to more affordable Texas when we got a chance to move for his ( new ) job that gave us more money and lower living expenses, that is very differant but just as nice in differant ways, we have been here eight years now.
It was hard to find someone to rent to us at first but we found a good land lord and were in that house until we moved to Texas. Three years total renting and then nine months here while we looked and closed .
I would have to say the biggest effects were emotional more than financial long term. In three years we were able to rebuild our credit and buy this house, but if we could have sold the house, paid the debts and downsized from that house to a small house with cash to pay off our debt and use the rest to either buy a smaller house cash or a down payment on a smaller house, we would have been thrilled, but we owed more then it was worth at that time and there was nothing we could do. We even consulted with CCC and they told us to file bankrupcy and let the house go but we were stubborn and first filed chap 11 and tried but the court ordered payments added up to as much as what we could not pay in the first place so after four months we switched it to a chapter 7. We had no choice at that point but to let the house go.
If someone can downsize for a while by selling the house, pay off all the debt, rent for a year in a cheaper house,if they do not want to buy a cheaper house, and save up, they could go back to a nice home as I am making the assumption with 200 grand equity it is a pretty nice house and not a small starter home.
So, honestly, finincally it will not affect them for all that long, except emotionally as for the rest of your life, even after it is off of your credit report, if it says, have you EVER filed bankrupcy, you have to answer yes, and that is something we will feel a bit of shame about whenever we have to put that down. Even after 11 years, it still hurts a bit.


Evan February 5, 2010 at 8:47 AM

GREAT Advice! The only thing I would maybe talk about is the possibility of dropping the house, and using the equity to get their life in order.

There are a ton of different sites where you can compre renting vs owning, and depending where they live with repairs, taxes, etc. it might just not be worth owning right now


Bryan February 5, 2010 at 7:30 AM

Your advice was good. In addition to negotiating the credit card debt, they should look into modifying their mortgage under the Presidents “Home Affordable program”. This program is designed precisely for people in their situation. IF they can get a lower interest rate on the mortgage through the program, they might be able to start paying down the credit cards with the extra cash flow. Lenders do not make it easy to modify. Tell them to be persistant and patient.


Neal February 5, 2010 at 11:59 AM

awesome idea…..I knew I could count on the Pilgrim Brigade!


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