Will ditching a car payment save home?

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Dear Debt Adviser,
I have two car loans and an outrageous house payment that I cannot afford due to a recent layoff and loss of income. The bank will not give me any help on adjusting my mortgage, as they do not take car payments into consideration with their hardship program. I do not want to lose my home so I am considering turning in one of my cars (we owe more that we can sell it for). I am sure there will be a deficiency balance. I am also looking into debt settlement instead of bankruptcy. What would you recommend in our situation?
— Lisa

Dear Lisa,
What would I recommend? I recommend that you call in the experts! First, I want you to contact a counselor at the HOPE Hotline (888)995-HOPE. The HOPE counselors come from a variety of vetted nonprofit housing counseling services. They have been extensively trained and have counterparts at most major mortgage lenders and servicers. They can get the right information to the right desk and short cut the entire process. Plus, they are free of cost to you, as they are HUD-funded.

Steve’s quick tips
  • Contact HOPE Hotline.
  • Try to trade down your car.
  • Check out bankruptcy, but don’t file too soon.

It sounds as if you should qualify for a mortgage adjustment based on your reduced income. Give them a call today and you’ll have a better idea whether it’s practical to pursue getting your mortgage modified to stay in your home. Another thing I encourage you to do is to determine whether or not staying in your home is realistic. You did describe your house payment as “outrageous.” Ask yourself the question, “If you were to become fully employed again at your previous level, would your mortgage payment still be outrageous? This used to be a no-brainer, but in today’s job and real estate markets it may be that your best interest will be served by not swimming upstream against the current for months and just arranging a graceful exit from the house with your lender.

Downsizing to one car loan as opposed to two would help ease the financial strain. The trouble with a voluntary repossession is exactly what you mentioned, the deficiency balance. Most people don’t understand that after a voluntary (or involuntary) repossession, their car is sold at auction, not at retail value. Often there is a gap between what is owed and what the car sells for. This is the deficiency you mentioned, and that deficiency is due and payable by the former owner. These balances can be thousands of dollars — not to mention the rather large negative on your credit history that a repossession would leave. An alternative would be to approach a dealer, perhaps the one where you purchased the car, and see if you could work out a solution. One option may be to trade in the car and purchase a less expensive or used car, and the dealer would include satisfying your current car loan as part of the deal.

Debt settlement would not be an option I would recommend for you. It is an expensive, adversarial and in my opinion, an unpredictable way to handle your situation. Debt settlement would require that you make monthly payments into an account while your debts age to the point that lenders despair of ever getting the full amount. This is a hardball game with additional complications caused by a lack of standards in the industry. Due to past abuses in this industry, the Federal Trade Commission has recently announced new restrictions aimed to crack down on debt settlement companies who have been advertising with increasing volume and frequency in the down economy. Under the new rules, debt settlers will now only be able to charge a fee once a customer’s debt has been reduced, settled or renegotiated.

I suggest that you consider bankruptcy as a last option. If you file now before your finances stabilize, you could accumulate additional liabilities after the bankruptcy. Then you’d have to live with the debts due to the time that is required before you could file for a second time. You can find a local bankruptcy attorney for advice at the National Association of Consumer Bankruptcy Attorneys.

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