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Real Life: Foreclosure Easier Than Loan Modification?

I have a friend that has fallen on hard times. Well, it’s not so much that she has fallen on hard times, but her that her husband’s business is failing and he refuses to let it go. Instead of letting the business close he has taken money from his wife’s 401K, advances off her credit card, and bill payment money to prop up his business. They have a 12 and 24 year old. The responsibilities of the running the household has fallen onto my friend. She pays all of the household bills including the mortgage, utilities and credit cards; has loans to put the older child through school; and is attempting to finish a certificate course to improve her income. I applaud her, but I know that the stress is weighing heavily on her.

A few months ago she confided her financial information to me. I didn’t judge because I thought that as a friend it was my responsibility to listen, then if she needed advice to offer her my opinion when she asked. Her situation was this:money house - Real Life: Foreclosure Easier Than Loan Modification?

  1. Her husband had taken an 8K advance from her credit card and never made a payment. The account was now overdue and the bank was calling her. I asked her if there was any that she could pay it or set up a payment plan. She said no.
  2. She was about 1.5 months behind on her mortgage and could not catch up. She had an adjustable rate mortgage that she paid late every month.
  3. Her son was no longer in school full time, but she had over 20K in student loans that she was responsible for paying. Her son was not working.
  4. Her husband was not contributing financially to the household
  5. She had filed bankruptcy roughly 8 years earlier from bills that her husband had accrued.
  6. She had loans on her 401K that would not expire until October.

It was a tough situation but I gave her the following advice.

Since she could not pay the credit card and it was already over 6 months late the account had already been charged off. At this point since there was no way for her to pay the full balance, she should not worry about the cards but tell their collections department that they could not call her at work. I told her to ask them to close the account and agree to a settlement. They agreed to a total that was 1/4 of the card balance. Keep in mind that the husband had taken the full amount as a cash advance very shortly after she received the card.
THE RESULT: She was put on a payment plan for the agreed on amount and the credit card company sent her a 1099 for the balance that she did not pay. Thus, this was counted as income that she had to include on her taxes.

For the house I asked her how much her mortgage payment was. She also had taxes and utilities to pay and she was often one to two months behind on those bills as well. When we did the math on selling the home and renting, her mortgage was actually less than or about the same as if she rented a 3 bedroom apartment and paid utilities. Part of the issue was that the value of the home had fallen since she had purchased it, and they had taken additional mortgages on the home than the original one. I asked her to call the bank and see if she was eligible to refinance the loan at a fixed rate or if she qualified for a modification.
THE RESULT: She was not eligible for either since her credit rating was low and she was not behind enough to qualify for a modification.

Regarding her husband’s business I told her that he should sell it if he could and hire himself as an expert to the following owner or to another business. If not he needed to close the business. If he was not able to do either she needed to separate all of her finances from his to protect herself and the children.
THE RESULT: Her husband would not entertain the thought of closing or selling the business. This can happen when someone becomes too emotionally attached to something that could bankrupt his family and leave them all out on the street. Unfortunately his priority has not shifted to his family yet. On the other hand had never filed joint taxes with her husband and after their bankruptcy did not have joint accounts with her husband.

Regarding her son, I thought that it was time for him to grow up. He needed to contribute to the home. She spoke to him about this and he began contributing $100 every two weeks to the home.

Now, I know that this is where you think that it should end, but it doesn’t. Remember that the bank didn’t help her and she did not want to sell her home. I told her that her other course of action was to stop paying the mortgage for a bit, save the mortgage money somewhere else, and then call again to see if they would consider a modification. I know that this is a radical step, but she was already behind and the bank would not help her. She didn’t take my advice, but instead fell behind by 2 months and was still paying the bank late. About 8 months after she had originally contacted the bank she received a notice in the mail that because of being 2 months in arrears the bank may take the following any of the following actions:
1. The bank would begin foreclosure proceedings on the home
2. They could seize the home, sell it, and use the proceeds to pay the mortgage
3. She could call them to see if she could qualify for a modification or payment plan
4. Bring the account up to date within 15 days

When she received the notice, she was understandably upset. Her husband ignored the notice and said they they would find a way to catch up and that she should not respond. Again, not the responsible course of action. I sat with her and discussed her options. I told her that the best thing should could do is call the bank to see if she could qualify for some sort of modification. I told her to tell the bank that her husband was unemployed (well he might as well be since he wasn’t bringing home any money) and that the increase in her mortgage because it had an ARM didn’t allow her breathing room to be able to pay the total mortgage every month. Based on what she told them, they sent her out paperwork to complete a modification. Now, it killed me that they couldn’t help her 8 months before when she had called them, but it seems that not paying them actually might be putting her in a better situation to be able to negotiate more with them. She is filling out the paperwork this weekend, and I will update you on what happened.

Beyond that I told her that she needed to sit with her children – both of them – and be very up front with them. The younger child was constantly clamoring for things even though she could not afford them, and feeling like the guilty mom, she tried to get them for him. The older child had stopped giving her money in the intervening months and sat at home doing nothing. I told her that he needed to see himself as an adult, and as an adult he has to contribute to keeping a roof over his head since he was not attending school. When she showed the notice to him, she said that he began to cry. I thought of that as a good thing, because he lived in la la land and needed a wake-up call. No more mommy buying $2K computers for him to tinker with and he had to get a job.

She also had to make some tough decisions on the “extras” that they had. I told her to downgrade the cell phones. The younger one did not need a cell phone. If she felt more comfy with him having a cell phone get him a prepaid one and it was ONLY to contact mom and dad in case of an emergency and not for him to talk to his friends with. They needed to stop ordering food for dinner. The older child should be able to cook dinner if he was not working. There was also no shame in clipping coupons. Heck, I make a game of it. They would also need to cut some of their over services including cable and dry cleaning. Finally, I told her to call Sallie Mae to see if she should get a deferment or forbearance on the student loan payments but that she should pay the interest that would accrue. She called and did qualify for a forbearance.

Now, I know that this is a tough situation and that people are walking away from their homes left and right, even when they can afford to pay, but was I wrong for telling her to fall even farther behind so that the bank would even entertain the though of modifying her mortgage? Also, I had a hard time understanding why she wouldn’t think of selling the home when we had first discussed it. We get too attached to things to the detriment of our families and our piece of mind. Which brings me to the husband. How long can you put something dragging you into the hole before your family and expect your spouse to stay? I’m not saying that she in thinking of asking him to leave, but you know, I wouldn’t be surprised if she did. Finally, if she knew that her husband was financially irresponsible after the first bankruptcy, why would she let him get advances off her credit card and take out a 401K loan for him? I have another friend that calls it being stuck on stupid. We hit the “stupid” mile marker and put the gear in “park” and stay there. Hopefully all works out for her and she is able to save her home. I’ll let you know what happens.

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