Who gets money when everyone can’t be paid must be a decision you make based on your own situation, not who calls you the most or who you owe what to. In most cases the first mortgage on your home will be on top. This obligation likely represents your largest payment. We tend to pay smaller creditors when money gets tight. Often credit cards and 2nd mortgages can be paid in full once first mortgage payments cease. This results in a short sighted solution. Soon your credit score drops and foreclosure on your home follows. Negotiating with first mortgage holders can be more difficult than with other creditors. But stop and think: If faced with the options of losing a credit card or losing your home, which would you choose? Your response to these and other questions should dictate your actions.
To evaluate your situation try the following:
- Figure out how much you saved or spent from savings to live last month. This number should be a hard fact. Either you added to an account or needed to borrow from savings, friends or relatives to make ends meet. Write this number down put it aside.
- Make a list of all available income for the month.
- Use the regular net income of both spouses.
- Do not include inconsistent items such as occasional overtime, tax refunds, or gift proceeds.
- Are working children or other adults living in the home who could contribute funds? This comment always meets with a lot of resistance, but when the other option may be losing the house, it must be examined!
- Make a list of extra income available.
- What savings can be used?
- Do you have available credit lines or available credit cards?
- Can you borrow money from friends or relatives or are owed money?
- Look under the sofa cushions (or any others sources which may be unique for you – a 401K plan or whole life insurance policy perhaps).
- Make a list of all monthly expenses.
- Essential Expenses – Food, that’s it for this category.
- Very Important Expenses
- First Mortgage (or rent)
- Other Mortgages
- Transportation for work
- Important Expenses
- Transportation – other
- Credit Card Payments (if credit remains good)
- Regular Expenses
- Most daily expenses
- Household goods
- Credit card payments (if credit is already tarnished)
- Luxury Expenses
- Wasteful Expenses
- Gambling or Playing the lottery
- Falling victim to scams
- Obtain your credit report. It can usually be obtained free (once a year or upon a turn down)..
- Complete a personal financial statement.
- Prioritize assets. Which do you need to keep, would you like to keep, wouldn’t mind keeping, and which would you just as soon get rid of?
- Which liabilities are reported to credit bureaus?
- Does the net monthly figure match the number you put aside back at item #1? Probably not, this time include everything you spend. Make up categories or call items miscellaneous. Go over the expense section again and again. Self employed debtors may need to revisit the income entries. When you have a net figure matches what really occurred proceed.
- Honestly evaluate your problem. Is it long term or short term? Has it been solved or is there a date certain when it will be? Will it reoccur? Is it permanent?
NO magic formula exists. So which is the best path from here?
Contact a debt professional to help you. An attorney who concentrates in debt workouts would be my first choice. Be careful, finding this type of lawyer can be very difficult. Filing bankruptcies in volume can be quick easy money for the law firm. Do not fall into this trap.
If you can not afford a lawyer look for a non-profit organization such as Consumer Credit Counseling Service. Be wary of individuals or for profit agencies offering these services. Some don’t possess the knowledge, others are out right thieves. Many just take your money and put you in touch with a lawyer they have selected based on a referral fee.
Sometimes people who have never been late on a payment in their whole life think they have a financial crisis when find themselves making payments a few days late. Often if your credit has not gone bad yet and you still have a strong income a debt consolidation loan or a credit card balance transfer may be all you need. Be wary that bad choices in the wrong circumstances escalate the problems and deepen the issues. Be even more careful about using emergency savings and most cautious of all about accessing retirement funds.
No matter what you do take an active role. Educate yourself, learn about the various debt options and be a part of both the professional selection and decision making process. Lawyers may try to push you toward a bankruptcy filing, consumer agencies lean against it. Do not ignore the problem.
This does not mean you should do your own negotiations any more than you should take out your own appendix. Saying you can’t afford a lawyer is like being too sick to go to the doctor. Lets take this analogy one step further. If most bankruptcy attorneys were doctors they would operate on every patient with a slight stomachache. Some consumer agencies would tend to keep a patient on antibiotics and not operate even if it meant the patient would live in the hospital for the next ten years.
Here are some guidelines to follow.
1. If you want to save your home, pay your mortgage first. If you are already behind formulate a way to catch up, then call the bank, tell them your plan and why it will work. Do the same for all mortgages or rent.
2. Communicate with your creditors. Don’t wait until you get in trouble. Before you miss a payment give them a call and let them know you need help and why.
3. Never waste money. No lottery, no gambling, no get rich quick schemes. Be very wary of scam artists, they will be out to find you.
4. If your credit has already turned sour don’t try to rebuild credit until the current problems have been resolved. Do not put good money after bad.
5. Paying more than the minimum payments on credit cards does not give you a better credit rating.
6. Don’t become emotionally attached to any asset. Re-evaluate all of your possessions and don’t be afraid to give them up. Should you be driving that Lexus or would you be better off in an Escort for a while? Maybe necessity dictates moving to a smaller house or a less affluent neighborhood. Evaluate your assets and property without emotional attachments.
7. Identify the cash drains and plug them up. This may mean closing a business or losing an income property.
8. If you are not making mortgage payments or they won’t accept your checks save the money. Don’t spend it on other bills. You may need it to save the house. The one ranks as one of the worst mistakes people make when facing foreclosure.
9. Don’t make arrangements you won’t be able to keep. Tell creditors what you can really do, not what you think they want you to say. Often professional foreclosure negotiators or debt negotiators can get a better deal for you.
10. Do not spend money on house repairs if you may be losing the house.
11. Explore all options but be ready for the worst, including an exploration of the rental market. Don’t pour money into black holes. If your situation has taken a permanent downturn to the point that an asset will ultimately be lost stop wasting savings or current income just to delay the inevitable. You will need that money for other things, such as finding a rental after a foreclosure.
12. Formulate a plan as soon as you see the first sign of trouble do not wait!
13. If home foreclosure looms above you ignore the collection agencies from the unsecured creditors. You have more important things to worry about. Don’t let them bully you into giving them anything. You may need every cent to save your home. If you really want to keep the house be prepared to work for it. This may mean cutting items you thought were essential like cable TV; or getting a second job. Find the time to deal with this problem. If your house matters to you, this is more important than almost anything else. If you hate the house anyway, don’t pour money in to save it, explore other residence options.
14. Don’t waste money or flaunt your spending. I once heard the story of a debtor who had almost completed negotiations with a bank for a deeply discounted settlement. When the loan officer was told the debtor was vacationing in the Caribbean, the deal was off.
15. Don’t file for bankruptcy unless it’s really the right thing to do. It may not be not the only option.
16. If you have bad consumer spending habits including but not limited to shopping addiction or compulsive spending change the way you budget money even if it means seeing a mental health professional for help.
17. Don’t spend money on big gifts or celebrations. Your daughter would surely rather have a smaller wedding than homeless parents.
18. If you have been able to save some money don’t leave it at a bank you owe money to. They might be able to take it from you without notice.
19. Once in the foreclosure process call a lawyer before paying anything. When you’ve reached this stage little time remains. You’ll need someone familiar with all legal options.
20. Important: Once you know you will be filing a bankruptcy do not run up a bill or credit card subject to discharge. This would be fraud, not to mention non-dischargeable. Think twice before not paying income taxes or your employees withholding or FICA match. These will probably not be dischargeable in bankruptcy.
You will not be put in jail for falling behind on your payments. You will not be shunned by the whole community. Most people will never know about your situation unless you tell them. Yes, this even goes for small towns with legal notices in the paper. Those who do find out will soon forget. Personal issues always interlace with your debt issues, but you cannot chart your course based on your emotion alone.
Perhaps the most important, don’t lose hope, don’t give up, don’t put your head in the sand.