What to do when you can’t afford your life
Dear Liz: I am 54 and my wife is 49. Because of a career change I made four years ago and my wife’s layoff, we have run up $50,000 in credit card debt and $61,000 on a home equity line of credit. In addition, our home is worth at least $40,000 less than what we owe on it. I have tried twice for a loan modification but was turned down. We had a late payment one month, so the bank will not consider a refinance for at least a year. We are current on everything, but just barely. We have no savings because we use all our income for bills. We have a child in college and another who is a junior in high school preparing for college. I feel like a hamster on a treadmill just waiting for a total financial collapse and certainly have no hope of ever retiring. In addition, I totally hate my job and its industry and feel like I’m in living hell. I have an MBA but think I may need more training to make me more competitive in the job market. Any suggestions?
Answer: Clearly you can’t afford your life. The fact that you incurred debt to switch to a career field you now hate indicates that you’re prone to making rash decisions. So the most important thing is that you thoroughly research your options before making your next step.
Contact a housing counselor approved by the Housing and Urban Development Department to discuss your loan modification options. You can get referrals from http://www.hud.gov. The modification process is so torturous and complex it can really pay to have an experienced hand guide you, but you shouldn’t pay thousands of dollars to an attorney or other “expert” when you can get low-cost or even free advice from a HUD-approved housing counselor.
If you can’t get a modification and your home costs are eating up more than 30% of your monthly income, seriously consider a short sale so you can move to a more affordable place. Here you will want an attorney’s help, because short-sale negotiations can be tough and the lender can keep you on the hook for the remaining debt if your agreement isn’t worded properly.
You’ll need to have a talk with your children as well. This will be difficult, but if you aren’t saving sufficiently for retirement, you can’t afford to help them with education costs. Your kids can get a college education on their own by working and using federal student loans, but they may need to switch to cheaper schools.
Think long and hard before you borrow any more money, for job training or anything else. A session with a career counselor could help you define other jobs you could get with your existing credentials. If you do need more training, get it the most cost-effective way possible. Nonprofit community colleges offer inexpensive courses at night that would allow you to keep your day job.
Although you don’t think you’ll ever be able to retire, at some point you won’t be able to continue working. Your priority should be to pay off your debt and build up your retirement savings so that you have more to live on than Social Security checks. Everything that doesn’t serve those goals has to be discarded, as difficult and painful as that may be.
Zombie debt may still hurt credit scores
Dear Liz: You just saved me $69! Eleven months after I was treated at a health clinic — where I paid the bill in full — I received a bill for $69. Because I have read so much from you on debt collection scams and zombie debt, I refrained from paying it. Before reading all your columns, I would have paid it without question, to save my credit score and avoid a headache. Instead I called the clinic’s billing department, with a receipt from last May that said my balance was zero. The billing representative told me that I do not owe anything and to disregard the new bill. It may not be a lot of money to most people, but it is money, and I am grateful to you for erasing biases taught to me as a child that have cost me in the past.
Answer: You’re not quite done yet. If you’re contacted by a debt collection agency, you need to send a copy of the proof you paid the bill to the agency, along with a letter saying that you don’t owe the debt and that reporting the debt to the credit bureaus would be a violation of fair credit reporting and debt collecting laws.
If the debt collector insists on reporting the debt to the credit bureaus, it could affect your scores. Continue monitoring your credit reports and be ready to dispute the bogus collection account if it appears. You may be able to sue the debt collector if it persists in reporting a false debt. You can find more information at DebtCollectionAnswers.com.
Dealing with parents’ financial crisis
Dear Liz: My retired parents are in a financial crisis. They got behind on their credit cards while they were trying to pay the mortgage on their home of 41 years. That home is now in a short sale. An attorney has advised them to file for bankruptcy to discharge the credit card debt and any debt that might remain after the short sale. After the sale of the home, I need to relocate them to my state so that I can further assist them, but I’m not sure if any landlord will rent to them given their terrible credit history, which will look even worse after the bankruptcy. Right now they make too much to qualify for subsidized senior housing. Any advice would be greatly appreciated.
Answer: You’ll probably have better luck with mom-and-pop landlords than with the corporate kind that run huge complexes. The mom-and-pop types tend to have more flexibility with potential renters who have tattered credit, particularly if those renters can make substantial deposits. If your parents don’t have much cash left over after bankruptcy — and they probably won’t — you may need to front them some money or consider letting them live with you while they save up.
You also should get a better idea of what caused their financial train wreck to see what you can do to help avoid further crises. If they’re suffering from diminished capacity, you may need to talk to an elder law attorney about taking over their finances for them. If they’re chronic overspenders, they may benefit from budgeting classes from a nonprofit credit counseling agency or community college. Even if the only bad decision they made was to continue borrowing against their home rather than paying it off, they could still benefit from some financial education and advice about how to live within their means. A session with a fee-only financial planner could help you all figure out what that will look like.
Short sale causes credit scores to plunge
Dear Liz: Do I need to stop making payments for my bank to consider a short sale? I moved and put my house on the market a year ago with no bites despite three price reductions. The only way I’m likely to sell it is to reduce the price below what I owe the lender. I want my credit to remain as good as possible, but worry that if I have to miss payments to get the lender to consent to a short sale my scores will be lower than if I had kept up the payments before selling short.
Answer: Lenders have different policies on short sales, which is when they agree to let a borrower sell a home for less than what is owed on the mortgage. You’ll need to talk to yours about what’s required. But expect your credit scores to take a major hit, whether or not you stop payments first.
A short sale typically will have exactly the same impact on your credit scores as a foreclosure, according to Fair Isaac, the company that created the leading credit scoring formula, the FICO. Fair Isaac recently released a chart showing the effects of various credit score blows, from a missed mortgage payment to a foreclosure or a short sale with a deficiency balance (which is the difference between the home sale proceeds and what you owe). Someone with FICO scores in the 780 range would lose 90 to 110 points with a single skipped payment. A short sale or foreclosure would trim 140 to 160 points from that 780 score. (You can see the charts at Fair Isaac’s Banking Analytics Blog, http://tinyurl.com/3eze2a5.) Your score will plummet that far whether or not you stop making payments before the foreclosure or short sale.
You might be able to reduce the damage from a short sale if you can convince the lender not to report the deficiency balance to the credit bureaus. Short sales without a reported deficiency balance would trim 105 to 125 points from a 780 score, according to Fair Isaac. But lenders who’ve been cajoled into a short sale often aren’t in the mood to grant you additional favors.
There are some advantages to a short sale over a foreclosure. One is that you can start the long road to credit recovery sooner, since foreclosures usually take much longer than short sales. The other bit of good news: you can qualify for another mortgage faster. Lenders typically will consider you for a home loan two years after a short sale, versus a wait of up to seven years if you let the current lender foreclose.
Don’t borrow for an education you can’t afford
Dear Liz: My son will be going to a for-profit technical school about 120 miles away from home. Unfortunately, we have not saved any money for his college education. What are our best options for borrowing to pay for his college education, which will cost about $92,000 for four years? He is not eligible for any financial aid other than federal student loans. Our daughter will graduate debt free with her bachelor’s degree in December. Since we concentrated on her education first, our son kind of got left behind.
Answer: Please rethink this plan, because your family probably cannot afford this education.
Federal student loans would allow your son to borrow, at most, about a third of this school’s cost. If he were to borrow the rest of the money, he would have to turn to private student loans, which have variable rates and none of the consumer protections embedded in federal student loans. Private student loans are like using credit cards to pay for college — except unlike credit card debt, student loan debt can’t be discharged in bankruptcy.
The other alternative would be for you to borrow the difference between his federal student loans and the cost of his education using PLUS loans. These are federal education loans for parents and graduate students. As with federal student loans, the rates for PLUS loans are fixed, although they’re somewhat higher — 7.9%, compared with 6.8% for unsubsidized Stafford student loans.
But using PLUS loans means taking on a lot of debt at a time in your life when you should be concentrating on saving for your own retirement. If making the payments would interfere with your ability to contribute sufficiently to your retirement funds, you shouldn’t even consider borrowing the money.
Even if you already have a well-funded retirement plan, you should think twice. Your son may be able to get a better, more affordable education from a public college — particularly if he starts at a two-year community college nearby, allowing him to live at home more cheaply, and then transfers to a four-year school.
For-profit colleges can be expensive, and loans made to students who attend four-year for-profit colleges have twice the default rates of loans made to other college students. Figures provided by the U.S. Department of Education show that of loans that entered repayment in 1995, 30% of those made to students attending four-year for-profit colleges were in default 15 years later, compared with 15.1% for four-year public colleges and 13.6% for four-year private nonprofit schools.
That high default rate should give you pause, even if you were paying cash for this education, because it indicates that many graduates either aren’t finishing their educations or aren’t finding jobs that pay well enough to repay their loans.
Critics complain that for-profit schools often over-promise and under-deliver when it comes to training students for existing jobs. The for-profit schools attribute high default rates to the demographics of their students, who are more likely to be lower income and from minority groups than other college attendees.
You may feel guilty for shorting your son when it came to saving for college. But please don’t compound the problem by blessing an education that could leave him, and you, with unaffordable debt.
