You have to be realistic about your debt situation

I got a call last night from a friend I had not seen in a while. She was in trouble with her debt and wanted to know if I could help. I listened to her story and decided that she was probably wasting her time trying to save a situation that could not be saved.

She owed $6,000 in back payments on her mortgage and could not make her next payment, which would have chewed up 80% of her monthly income, even though she had negotiated a temporary reduction in the payment from her lender. Most people cannot live on 20% of their monthly income.

She had tried to sell her house, but no one is buying in her area. She had thought about bankruptcy and we discussed that, but she did not want to do it unless she could save the house. She had a vague plan to get roommates to help with the mortgage.

Bankruptcy can forestall foreclosure and can save your house, but not if you cannot afford both to pay off the mortgage balance (over time) and to resume current payments. Going over the numbers, I did not see how she could do that, even with rommmates.

In my opinion, she should stop wasting her time, and do one of two things.

1. Negotiate a “short sale” with the bank. In a short sale the bank takes possession of the house without objection and they agree not to go after you if they end up selling it for less than the mortgage, which is highly likely here given the market it is in. This would leave her with only her credit card debt to deal with.

2. She could file bankruptcy without intending to keep her house. This could eliminate credit card debt and protect her from recourse on the mortgage.

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