Mailbag Monday: A Mountain of Debt
My husband is an entrepreneur and we were living for years within a budget that turns out not to be real (our savings and investments were used as salary). I have discovered all our savings (including 401k) are gone. We have $0 to our name. I also discovered that we are in debt up to $494,000, which includes a home equity loan on my in-laws home, a car loan, money borrowed from friends and his parents, and credit cards. Our health insurance has just been cancelled. We are unable to pay our rent of $5,200 and our car loan is in default. I don’t know the first thing about taking a step forward with this mountain of debt on top of me. I negotiated with all the credit card companies to reduce interest rates and drop late fees and I make double payments on the cards.
— Suzanne
Suzanne, this sounds like a scary situation — but it also sounds like you’re getting a handle on things. It was smart to call your creditors and negotiate a better rate. The next thing I think you are going to need to do is downsize. You’re lucky in that you rent, so you have the flexibility to move to a less expensive property. I highly encourage you to do that immediately – you simply cannot afford this home. Cutting that chunk of your budget will free up more money that you can use to save and chisel away at those cards and other loans.
Then I want you to consider where else you might be able to make cuts. Can you drop down to one car? A less expensive car? Cut the cable or any other extra services? Go over your budget with your husband and see what can be cut back. I guarantee you will find some savings. And it sounds like both your and your husband’s income is somewhat sporadic, so I want you to get on a system in which you deposit your income into a savings account, then pay yourself a set paycheck each month. If you earn more one month, you still get the same amount – because it accommodates for the months during which you’ll earn less. This is a wake-up call that you needed to get more involved in your finances – it’s never too late.
If that doesn’t work, and you feel like you’re facing bankruptcy, I wanted to address how that might work with all of these loans from friends and family members. When you file bankruptcy, every loan must be listed, even loans that are undocumented among friends. If they are unsecured, and they get discharged, you won’t have to pay. That doesn’t mean you can’t – or shouldn’t – pay these people back, but they won’t be able to do anything to collect the debt. For the home equity loan, if no one pays it, the lender can foreclose. If your in-laws continue to pay it and you do not, they will likely be able to keep their home, even if you are on the loan and you file for bankruptcy. Your obligation to pay your in-laws for that loan may be eliminated, but again, you could continue to pay.
