Author Topic: Case Study: Dig out or walk away?  (Read 3086 times)

veronica mars rover

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Case Study: Dig out or walk away?
« on: March 27, 2012, 07:27:30 AM »
Hi folks,

I adore this blog and I'm so excited that there is a forum now!  My family and I thought we were doing everything right--no credit cards, no car debt, free entertainment--but we did literally everything wrong!  We bought a house with a crummy mortgage and nothing down, we had babies before we were even close to financially ready, and we financed our educations with expensive loans.  When I was working, we barely made it every month.  Now I've lost my job and I feel like we're at a crossroads: get another job and continue to just barely make it, or do something really radical.  Since Mustachians do radical better than anyone else, I figured I'd pick the collective brain.

I'm going to lay out my numbers and what I think are my options.  Good Mustachians, please don't hold back! 

Expenses
Mortgage: Monthly payment $1691
(We owe $190k; it was assessed last year at $145k.  Our next-door neighbor's house has been sitting on the market for almost a year at $100k and our houses are functionally identical.  We also pay annual property taxes of $4500.)

Daycare: $1020, plus occasional late fees that start accruing after 5 minutes' lateness.  Usually we pay an extra $20-$50 in late fees.

Utilities: $200

Home alarm and phone line (bundled with internet): $85

Cell phones: $145

Car insurance: $80

Undergrad loans: $200 (three separate payments to private lenders: $75, $75, and $50, with respective balances of $7k, $5k, and $3k)

Grad loans: $0 (currently we make too little for our family size to be required to pay, so interest is accruing.  We consolidated and have a balance just shy of $200k.  If we switched to Standard Repayment, we'd pay $1800.)

Gas: $100 (we have aging parents in another state and we drive to see them at least once a month)

Groceries: $400

Netflix: $8

Income
Partner: $47k, take home (after tax and family health insurance) $2422

Me: Was making $60k.  If I get a comparable job in my field, I will probably bring home $50-$60k, with a take home of about $3000.  My job loss was very recent and I have one last paycheck coming to me.

Ideas
1. Walk away from the house, file BK to avoid a judgment, and rent an apartment in our parents' state.  Our earning potential will be roughly the same and then we can really focus on the student debt.

2. Try to get a job that qualifies for Public Service Loan Forgiveness, so the student debt will be gone in 10 years. 

3. Try to get a job comparable to the one I had and hope the pay goes up after a few years.  If I become more successful, our kids will have a better chance at good financial health than we have now.

4. Try to find night-shift employment, like security or hospital admissions desk, so that we can stop paying for daycare.

What do you think?  Should we try to dig out or should we walk away?  Or is there a more Mustachian option that I'm too close to see? 

arebelspy

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Re: Case Study: Dig out or walk away?
« Reply #1 on: March 27, 2012, 08:05:12 AM »
The house isn't that underwater.  The grad loans are.. a lot.  200k accruing interest is rough.  Is there some reason you can't get a job utilizing those degrees that pay more?

The school loans won't go away with BK.  In fact, even if you walked away, I wouldn't do BK.  I don't think you'd need to in order to avoid a deficiency judgement. There are other options to avoid that.  They will ruin your credit, but so will walking away (and obviously so will BK).

There's a lot of fat to be trimmed in that budget.  I'd start there, work on getting your expenses as low as possible while applying for jobs.  Get into a more stable situation ASAP ($$ coming in, less going out) and then reassess.

A few ideas from a quick glance.  My apologies if it seems harsh.  You might need it:

Refi will be tough being underwater.  Have you looked into the mortgage assistance programs such as HAMP and HARP?

Why the heck are you paying late fees for childcare?  Get there on time!

1000+/mo for daycare. Is there a less expensive daycare option?

Utilities may be able to be reduced with Mustachian energy principals and such.

Ditto phone/internet, see if you can get below 85.  Do you need it to be that fast, honestly?

$145 for cell phones?!  See the MVNO thread on these forums and get that down, now.

Target your debt according to interest rate.  That is, even if the grad school ones aren't due yet, if they're at a higher rate, pay extra towards them and not undergrad. They're still accumulating interest, and you'll have to pay them off at some point.  Exception if you're REALLY tight on cash flow, and need to free some up by paying off an undergrad loan or two.

Can you get a more gas-efficient vehicle?

$400 in groceries isn't terrible, but could be better.

Do you qualify for unemployment?  (I.e. what is the reason you no longer have your job).

I don't think walking away helps you that much.  Your main debt is those student loans.  The way out is to tighten down, get frugal, throw all your money at your debt (or, if at significantly cheap interest rates, invest a * ton of money and have that eventually pay off the debt).
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sulaco

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Re: Case Study: Dig out or walk away?
« Reply #2 on: March 27, 2012, 08:10:20 AM »
Mortgage: Monthly payment $1691

This is ridiculously high for this amount of principa (depending on how ling youve lived there)l. I'd start calling to refi, but it may be difficult given your job situation.
.

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Daycare: $1020,


Without a job, do you still need monthly daycare? 40% of your partners income is going to daycare.

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Home alarm and phone line (bundled with internet): $85

Call about a cheaper rate. We currently have 3mb/s Internet through Comcast for $40/month. It's screaming fast compared to what we previously had.

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Cell phones: $145

Cell phone and a land line? We're on America's most expensive network, with two data plans and pay less than this per month. Call and ask about unadvertised rates with fewer minutes. If you have a landline, you probably don't need many cell minutes. Any smartphone has free texting apps. Paying for texting is something you can't afford right now - so is data, but you may be locked into a contract.

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Car insurance: $80

Is this for one car or two?  If its for one, you should be able to get it down to <$60/month. If its for two, get rid of a car.

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Groceries: $400

For two, we spend between $220-$300/month eating mostly organic. Shop for deals, eat in season, buy staples and cook.

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Netflix: $8

We can afford it, and we don't spend $8 on Netflix. Hulu is free, redbox is likely cheaper.

Some of the above advice might seem tough, but you should be in survival mode right now. Between mortgage and daycare, all of your income is being spent. On top of that, your spending on luxuries that many of us with higher joint incomes would consider frivolous.

I think your job situation needs to improve, but while you're looking start cutting out all of the whipped cream, and call about moving to cheaper plans on all of your monthly expenses or eliminate them entirely.

While moving might be cheaper, it's also another expense, which is really hard given your budget. If you were planning in moving in with parents to eliminate rent and daycare completely, that might be worth it, but there is still a risk in giving up a perfectly good job.

palvar

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Re: Case Study: Dig out or walk away?
« Reply #3 on: March 27, 2012, 09:01:22 AM »
Daycare seems like the best place to start.  If you are staying home with your kid(s), you can put that whole $1,000 into your student loan and you should stop accruing interest.

$200,000
6%
$12,000/year interest or $1,000 per month.

Do you have room in your house for a roommate?

velocistar237

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Re: Case Study: Dig out or walk away?
« Reply #4 on: March 27, 2012, 09:30:38 AM »
You're in the really tough position of having a child while needing two incomes. Hang in there.

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1. Walk away from the house, file BK to avoid a judgment, and rent an apartment in our parents' state.  Our earning potential will be roughly the same and then we can really focus on the student debt.

Are you paying PMI? PMI would effectively be your highest rate loan. If you do stick with it, work to pay down your mortgage and get rid of PMI before accelerating any other loan payments. With PMI, the effective loan rate on the remaining 20% down payment amount can go as high as 15%. Look into what it would take to get it removed. Because your house value has dropped, you might need to pay the loan down to 78% LTV and send a letter to your bank asking them to remove PMI. If you have an FHA loan, you might be out of luck until you've stayed for 5 years.

Are you in a recourse state, where the lender can go after you if you get foreclosed? I suppose that's what the bankruptcy would avoid.

Would it be possible to live with parents, or park an RV or tiny house on their property?

My brother recently sold at a loss and moved. I'm pretty sure he'll come out ahead in a few short years.

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2. Try to get a job that qualifies for Public Service Loan Forgiveness, so the student debt will be gone in 10 years.

Are you sure you qualify? Some consolidations don't qualify. If you do, this sounds like a good option, but only if IBR keeps your payments relatively low. PSLF is great because the forgiven loan doesn't count as income.

Whose loans are they? The person with the loans has to work at the non-profit for it to count. If you both have loans, you both would have to find jobs at non-profits in order to PSLF the whole amount.

I have heard of people having student loans dismissed in bankruptcy, but it's really up to the judge to determine whether you are under enough financial duress. With a combined income over $100K, that might not be possible.

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3. Try to get a job comparable to the one I had and hope the pay goes up after a few years.  If I become more successful, our kids will have a better chance at good financial health than we have now.

4. Try to find night-shift employment, like security or hospital admissions desk, so that we can stop paying for daycare.

Your day care cost actually isn't that bad, unless you only have one child. Around us, it's $1200/mo per child. At $1100/mo and a total tax burden of 30%, that comes out to about $19K of salary per year. If the pay cut for the night shift job is more than that, it's probably not worth it. You might be better off if your partner took the night job, since it wouldn't take as big of a salary to make it worth it.


If you can do 2 & 3, and your partner can do 4, you'll be well on your way. If your parents can come live with you and watch your children, even better. If you can live with your parents, even more so.