Q&A: How to pay down debt

Dear Liz: I am wondering about what to do with some debts I have due to divorce. I make about $50,000 a year and owe $50,000 in credit card debt, attorney’s fees and back property taxes. The good thing is that I own a house free and clear that is worth about $2.5 million. The bad thing is that my credit score is terrible, about 450. Should I slowly try to pay down my debt? Is there anyone who would lend me the money with a home equity line of credit or something similar? I have two children in college who need money from me as well.

Answer: Paying down what you owe over time could be difficult given the size of your debt relative to your income. Often when consumer debts equal or exceed a person’s annual pay, it’s time to consult a bankruptcy attorney. That may not be a good option for you, though, because a bankruptcy court might require you to sell your house to satisfy creditors. Only a handful of states, including Florida and Texas, protect the entire value of a home in bankruptcy.

You could try to get a home equity line of credit, but you’ll probably have a tough time finding a lender. If you succeed, you would face high interest rates.

Selling the house and downsizing could help you settle your debts and free up money for your children’s educations. That’s a big move, though, and could have tax as well as financial aid implications.

Your debt shouldn’t be your only concern. You also need to think about how you’ll pay for retirement and other future costs, such as medical expenses and long-term care.

You need some help making these decisions. A fee-only planner could look at your entire financial situation and offer advice, as well as referrals to tax and bankruptcy experts who could offer their assessments of your options.