Last week my girlfriend and I were watching, “Real Estate Intervention” on HGTV. It’s a heartbreaking show at times. It shows real families that for one reason or another (job loss, relocation) have to sell their home, often a price much lower than what they were anticipating.
Last week we watched the first episode where Mike, the expert real estate agent recommended a short sale. The man on the show broke down crying after he saw his wife get upset. They owed $520,000 on their home, and the market value was around $400,000. They had no assets to speak of, and purchased the home with 100% financing.
They didn’t mention any credit card debt specifically, but I’d like to pose a question:
If you are broke, do you pay your credit-cards or your mortgage?
The catch: You are significantly underwater in your home ($40,000 or more)
When I went to credit counseling back in the day, my counselor told me she always recommended people pay their mortgage first.
So, if you can only choose one, based on the scenario above, which do you pay?
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Either way, your credit is trashed. If in such dire straights on both fronts, filing bankruptcy is going to put you in the best position years hence. It’s not that I am an advocate of walking away, years ago, early 90’s I was in debt both upsidedown on Condo, and deep in CC debt, but worked them both off. I felt good about doing the right thing, but would be much further ahead had I left it all. 7 years later, buying a house, I’d have had a larger down payment, and more retirement money saved.
Mortgage. They’ll take your house from you, but credit cards are unsecured.
As someone who just successfully modified vs. facing foreclosure, my biggest regret is I tried to handle both the modification payments AND past due credit card payments.
I should have let the cards just tank.
I’d be in the same boat credit score wise now anyway but I’d have several thousand dollars to my name to either START working down the credit cards or keep on hand for emergencies/future mortgage payments.
I have no intention of stiffing the card companies but when push comes to shove the cc companies can shove it a la Dave Ramsey. Their terms really do put you over a barrel even when you’re trying in good faith to pay up. You’re better off with the marred credit and a POSSIBILITY of them suing you for the balance (if worse comes to worst) . You can always settle with them somehow.
Oh, and settle I may still need to do with card companies; after all the payments I made on short-term catch up plans (some mins. were $300 to stay on the plan), the cards are right back in overlimit status with collection calls coming in anyway. Lot of good it did to even TRY to work with them while in such a state.
My opinion is….Mortgage first !
Mortgage. Credit card debt is more easily renegotiated because it is unsecured debt. The worst they can do is garnish wages (if your state allows it and they get a judgment on you) or put a lien on your house. They can’t actually seize the house, from what I understand. Either way, your credit is trashed, but your house is more than just an investment, it’s shelter and a roof over your head.
When you’re talking secured debt (mortgage) vs. unsecured debt (cc), you ALWAYS pay the secured debt first. And you NEVER take out of secured debt (like a HELOC) to pay for unsecured debt. I am the only one who listens to Suze Orman?
Oh the dilemma. You pay the thing that keeps a roof over your head first. In the example you mentioned, they obviously could not afford the home. 100% financing?! Come on now.
It’s better from them to rent something and short sell the house. I would hazard a guess that renting would be cheaper than trying to keep a home going. Then I’d work on the credit cards or file bankruptcy.
It comes down to this for me: Would I prefer to be homeless with a zero balance credit cards, or living in some kind of housing with the creditors knocking at my door and calling me all the time?
I choose the home.
Home.
I don’t really understand the logic of individuals who don’t pay their mortgage (in the scenerio where they are employed and have enought to pay the payment) because the value has gone down and the house is underwater. I do not believe that a home is an investment that will just keep going up.
However, I do believe that a credit card company can file a lien and then it’ll eventually have to be paid off if the homewoner refinances or sells.
Of course , pay secure debt like mortgage over unsecured debt like credit card. What I would do is start renting out a room or two to other people to pay off credit card debt.
It is an interesting decision. My first reaction is pay the mortgage, heck with the credit cards.
However, I think this depends. Theoretically, you will have to pay off all your debt eventually. The house has a lower APR and the credit cards higher. However, the house is a roof over your head and either way your credit is going to be marred.
Worst case, you can’t afford either. I think this calls for bankruptcy or if you don’t want to do bankruptcy some other professional help. After all bankruptcy is less useful now anyway.
In this case, stop paying them all, save, save, save and get money to put towards an apartment. It takes a few months to get kicked out with an eviction and save the money you’d be paying them to take care of yourself. You can always find a local landlord who may not run credit checks, or heck offering to pay 3 months off the bat sure says a lot. Right now I think someone would be understanding.
I think it also goes without saying to keep the utilities on while this is happening and take good care of the house. If nothing else, the more they can sell the house for theoretically the less you will owe.
I’d advise the same if you can pay the credit cards but can’t manage the house and it’s dragging you under. Get some sort of debt consolidation or help if you can to bring the APR and any monthly fees down and get a handle on the cards. Save money from not paying the mortgage and get yourself set up for an apartment while you wait to get evicted. In this case I’d also look more at short selling the house as your financial situation is more secure.
If you can swing the house and utilities, I say heck with the credit cards! They are unsecured debt and they knew what they were getting in to (that a certain % of people will default). Again, you can try to work with them on some sort of debt consolidation but others would know more than I do about that.