Dear Debt Adviser,
I am working but had my salary reduced. I have a first and second mortgage and $100,000 in credit card debt, an unemployed wife and three kids. I visited a bankruptcy attorney and he said not to pay down the card debt and pay just the mortgage because I do not qualify for Chapter 7, and Chapter 13 is not worth it in my situation.
I don’t know if this is sound advice. I have not paid down my card debt for two months and now have collectors calling me. I owe $640,000 in mortgages and my house is appraised at $529,000. I was told by my lender that I don’t qualify for any mortgage loan modification programs. What should I do?
This reminds me of the time I went to my son’s pediatrician. My son was a little guy and still in diapers. He had a rash, so my doctor said to let him go without diapers for a while. Good medical advice, I’m sure, but it failed to take other environmental considerations into account.
When you went to your lawyer, you got legal advice. But not paying your creditors is a messy solution. You are beginning to get calls. They will be followed by legal letters and maybe wage garnishment. This is not the help you need. Here is some advice that goes beyond the law and, hopefully, it will be more useful.
You are a man in need of a plan, and you’re in need of better advisers. I am going to go out on a limb here and assume that you did not plan to accumulate $100,000 in credit card debt and that your wife would take a job if she found one, even if it was only part-time. I suspect your serious problems started, as it does with many people, when you suffered a reduced income. You had the same expenses but less money to pay them. So less income means you have to reduce expenses or find additional income.
The solution to your problem is increasing your income or lowering your expenses, or both, but not overusing credit. You need a better job and/or your wife needs a job. A bankruptcy or damaged credit report and score can hurt your chances of getting a promotion or a new job. So I want you to try to keep up on your credit card payments, if you can, while cutting back everywhere else. Take a look at your expenses and cut where you can. Typically, the fat parts of a family’s budget can be found in entertainment, clothing, food and transportation. The chances of cutting out $100,000 is small, so I want you to focus on trying to get enough cash freed up to make your minimum payments until your employment situation clears up.
Next, I recommend that you visit the new FICO-affiliated Web site on mortgage relief and fill out the eligibility form to determine if you qualify. Even though your lender informed you that you weren’t eligible for a loan modification, I’d prefer you get the scoop from an unbiased party. The services provided at Mortgage Relief Online are free and use FICO analytics, so take advantage of the assistance.
For the short term, I also want you to communicate with your credit card lenders rather than just not paying them. The debt that you owe is not going to go away if you stop paying. Instead, call, explain your situation — it’s not unique — and ask for a hardship program until you can increase your income level. Many card issuers are making it easier for consumers in financial trouble to work out repayment plans that are affordable.
Long term, once your income is back online, I suggest you contact a nonprofit credit counseling agency to work out a long-term solution to the $100,000 diaper you managed to fill. They can help with a plan and perhaps lower interest rates and, oh, yes, their help is free. Look for a member of the National Foundation for Credit Counseling or the Association of Independent Consumer Credit Counseling Agencies.
The Debt Adviser, Steve Bucci, is the president of Money Management International Financial Education Foundation and the author of “Credit Repair Kit for Dummies.” To ask a question of the Debt Adviser go to the “Ask the Experts” page.