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?
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