Get Out of Debt Guy

Just Getting Back on Our Feet Again

Posted September 21, 2013

WRAL Reader Question

Dear Steve,

My husband and me are upside down on our mortgage and are in the process of doing a shortsale.

In the meantime, his mom passed and he was willed her home. It is worth approx 150,000 with no mortgage. My husband was also willed a 2009 vehicle with only 30,000 miles on it and in pristine condition.

We have 33,000 in credit card, student loan debt, medical and dental bills.

We are a few months behind on CC payments and I am considering trying to haggle for a settlement of less than what is owed.

My husband just returned to work after 2 1/2 years with no job, after his employer of 24 years folded. I have been on disability for 18 years.

We have no savings after going through it during this financial "crisis".

We are planning to live in his moms home.

My question is this. We need to pay off the 33,000 in debt and then we will have just our everyday basic bills and expenses.

Does it make more sense to sell the car (worth approx 17,000-18,0 00), and use the money to pay on the debt, or should we get a HEL or HELOC to pay off all the debt?

We do not want to do anything to jeopardize the house. We just need some advice. The last 2 1/2 years have been hard and I feel like we can get a fresh start if we make the right choices.

I love reading your advice and if all of us would live by it, we would be much better off financially!

Thanks,

Sue

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Dear Sue,

Thank you so much for being a loyal reader and writing in.

It seems you've certainly lived through a stressful and financially trying time. And it is a sad time to deal with the loss of a loved one as well. However you were fortunate enough to have been left some assets that can assist you with your lives to come.

Selling the car makes sense if you already have a vehicle. If you keep the car it just means more bills and obligations for something you don't need. You might was well use the cash to deal with some of your debt.

You've already indicated you are a few months behind on the credit card debt. Between month three to six you may start receiving offers from creditors to settle the debt for less than you owe. Just be aware, there are some consequences for settling. The primary issue will be if you are not insolvent the amount of debt forgiven will be taxable, just as if you earned the money.

In addition the forgiven debt will be reported on your credit report but then again the delinquent payments are also already being reported and will remain on your credit report for up to seven years.

You did not say how much credit card debt you had but let's say you will settle the debt for about half of what you owe, I would not be in a rush to pay off the other student loan debt right away. If it is federal student loan debt there are options that might be able to reduce your payment (read this) and that would allow you to use some of the proceeds of the sale of the car to rebuild your emergency savings. Living without an emergency financial safety net is just setting you up for disaster.

And speaking of student loans, if this is private student loan debt, it is in your name, and you are permanently disabled, more private student loan lenders today have full discharge programs they just don't promote publicly.

The last option here would be a HELOC. Since your life situation is just starting to stabilize and you have no fallback emergency savings, I'd hate to see you start out already encumbering the property. There are some real life benefits being able to live mortgage free.

What do you think, does that sound like a reasonable approach?

Steve Rhode
WRAL Get Out of Debt Guy

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  • steverhode Sep 24, 2013

    @cushioncritter Good question on the short sale. If the issue for the short sale is to reduce the house to the current value and the person is upside down, I've not seen a creditor balk at that for that reason.

    Creditors settle debt every single day and there is no reason to believe that simply because the person may be inheriting the new house it will in any way alter the predefined process at the creditor to settle. But as I mentioned, the new house may make them solvent so the forgiven debt on the settlement will probably be taxable.

    The key to working with creditors is not to apply logic but to understand the processes and procedures they have in place. Logic and creditors do not seem to coexist many times.

  • nctaxguy Sep 24, 2013

    Finish the short sale, live in the free house, drive the free car, sell the other cars. Now that your husband has a job use his income to pay down your cc bills. In a year or two you will be debt free and can accumulate for the future. Any advice other than this is disingenuous or expects you to take advantage of your situation.

  • cushioncritter Sep 24, 2013

    If the creditors find out about new 'assets' (willed house and car), won't they stop the short sale and refuse to take 50% on the dollar for CC debt?

  • research9 Sep 24, 2013

    Sell the house for 150,000 and the car for 15-18K. Buy a house for 100K. Net profit.

About this Blog:

Steve Rhode has had careers in opthalmology, real estate and as the head of a nonprofit debt counseling firm. On his blog, he offers hard-won, free advice about getting out of debt, consolidation and making the right choices as you manage your money.