Should We Walk Away From Our Mortgage? – Phyllis


“Dear Steve,

We bought a house three years ago – ARM, two mortgages, total payment 2562. One year after we purchased the house, we were in the middle of refinancing when my husband lost his job. He was unemployed for four and a half months and we had to use our retirement to keep our bills current.

My husband secured contract jobs for the next year and a half as a self-employed contractor. We were told we could not refinance until he was self-employed for at least two years. In the meantime, our house value dropped way below the loan amount. We currently owe 213,000 on the first mortgage and 52,000 on the second.

My husband finished a contract in April of this year and the job market has been scarce since then. I have been looking for work but things are slow. I have been a stay at home mom and I homeschool my youngest daughter. My husband has requested loan modifications from both mortgage companies. I don’t have a lot of hope for that since I fought the primary lender for six months last year to get the rate frozen. I was successful because an employee gave me a phone number I was not supposed to have (it is usually accessed by credit counseling services) and a loan officer lied to me.

My husband has a contract that is scheduled to start on August 3rd in Maryland. He may not get paid for up to two months after that time. In the meantime, we have not heard from the mortgage companies yet. I have an appointment set up with a credit counseling service on 7/16. We only have 780 in savings, 1000 left in retirement, and 2800 in the bank. We are current on all bills. If we pay the August mortgage, there will not be enough money to eat nor pay bills. What advice can you recommend? Should we default and move on? How can we get into a rental property if we default?

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Dear Phyllis,

I think the balances dictate the most prudent course of action, which is to move on.

Your goal at this point needs to be to secure new accommodations rather than attempt to repair the past. You will be able to rent, maybe not for a big corporate landlord, but certainly from a private landlord.

I also don’t think that without any income coming in that you can begin to embark on a credit counseling program. Get settled first in your new location and make sure you’ve got all your basic expenses covered before you even think about making any repayment promises.

One point to consider is that through a series of events you have slid so far down that recovery through repayment may not be possible. You might have to consider bankruptcy in the future.

Yes, it is a hard solution to consider, but let’s look at the facts.

  1. You income potential moving forward is not certain.
  2. You have spent down savings and emergency funds.
  3. You may not be able to replenish emergency funds without first eliminating your debts.
  4. Any repayment plan may demand so much from you that you can’t afford to save to protect yourself in the near future.
  5. The lack of emergency savings can leave you in a more desperate position when this new contract ends.
  6. As a self-employed contractor the most important obligation to pay will be all IRS liabilities owed, before anything else.

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