Debt dilemma: Sell home or file bankruptcy

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Dear Bankruptcy Adviser,
I am presently contemplating bankruptcy because we have less income to keep up with our debts, our mortgage loan and my credit card debt. My husband filed bankruptcy a year ago. He is a contractor and we suffered tremendous hardship due to the economy.

I own my car. I have $23,000 in credit card debt and a mortgage loan that is upside down and has no equity. The ideas I have are to sell my car, pay the back payments on our mortgage loan, file bankruptcy for the current credit card debt and lease a vehicle. I am so confused about what to do, and just recently my husband’s vehicle just got repossessed. What are your suggestions?
— Rita

Dear Rita,
I can sense the depression in your question. And I am sorry to hear you are so overwhelmed. It is disheartening to hear what is happening to so many people and it appears things are not getting any better. I just wonder if you are making a wise decision.

I cannot completely answer your specific question as to whether you can sell your car, bring your mortgage loan current and then file bankruptcy. In most bankruptcy situations, there is nothing inappropriate about this plan.

In some situations, though, this plan may not be appropriate. For example, let’s say that you filed bankruptcy today. You have equity in your home, which is protected in bankruptcy. But your car is not protected because it has too much value. If you sold the car before filing bankruptcy that means you used an unprotected asset — your car — to save a protected asset — your home. This could cause a lot of problems in a bankruptcy case.

You do state that your home is upside down, which means you owe more on the property than the house is worth. When people have a home but also have a car that is paid in full, sometimes the best advice I can give is to seek more advice. Even if you file on your own or with an attorney, a competent bankruptcy attorney could tell you in less than 10 minutes whether you are thinking of a legal plan of action. Each state has different bankruptcy laws and you need someone with experience in your particular state.

Rita, my bigger concern is that you are letting emotion control your thinking. Obviously, you are attached to your home. Regardless of the market value, it has sentimental value to you. I understand that walking away from your home could be the hardest decision of your life.

Try to look at your situation objectively. You and your husband are not earning enough to cover the mortgage. Your plan is to sell a paid-in-full car to bring your mortgage loan current, but for how long? Maybe you will be able to bring the mortgage current but will not be able to make future payments. I don’t know how prudent it is to sell your one asset, something that you and your husband may need to get to work, in order to buy yourself only a few short months in the house.

Even more concerning is that you will try to lease another vehicle after selling your car. That would result in a mortgage payment and a new car payment. Your husband just had his car repossessed, so it appears unlikely that you can afford to add another bill to your budget.

I understand you are trying to be optimistic and believe things will turn around soon. But if that does not happen, you have simply plugged the hole in the dam for a while, only to soon see other leaks emerge.

In short, you need to consider the long term and avoid decisions based on fear, anger and grief. There is life after losing a house. You may be able to buy another home sooner than you think. If possible, step back and view your situation void of emotion, and then proceed with a plan. That will ultimately lead to the best outcome available.

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