Last week I received an email from a desperate couple in Illinois. Here’s the edited version of their note:
"My wife and I have been struggling, morally, with what to do. We have two interest-only, adjustable-rate mortgages with two different lenders coming due in May of 2011. I currently can handle paying all my bills–but just barely, with nothing left over for replenishing of the emergency fund, or even my kids' college savings.
In one year, when those adjustable rate mortgages adjust, it's a different story. The home is now worth about 70% of the loan values. We do not want to stay in the home and have been trying to be proactive about doing something before the rates adjust. My lenders both said that if I do a short sale they would definitely make me sign a promissory note (for the deficiency). That defeats our purpose, so it is not an option for us. Bankruptcy attorneys have told me I make too much money to file for Chapter 7. I am currently employed. Last June I lost my previous job, and squandered our savings to stay above water with bills and the mortgages. Hindsight is 20/20 and at the time I should have filed for Chapter 7.
So, I am considering just letting the home go to foreclosure, saving my money, paying off other smaller debts (such as credit cards, and car loan), but am hesitant. I want/need to do the right thing fiscally for my family, but am wavering on the fence as to just take the plunge or not in a strategic foreclosure.
What should we do?"
These people are far from alone. Millions of middle-class Americans today are in a similar situation. They are struggling with their mortgage payments, and cannot sell because they are a long way underwater, owing more on their home than it is worth. They have wiped out their savings trying to keep up. One worker in six is either unemployed or underemployed, and there is a tsunami of rate resets coming in the next two years.
No one forced them to borrow –but no one forced the banks to lend either. More important right now is how they get out of it. I took this conundrum to two experienced bankruptcy attorneys–Richard Nemeth in Cleveland and Jeffrey Tromberg in Ft. Lauderdale, Fla.–for their advice. Here are some thoughts they offered.