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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.