Author Topic: Case study: Digging out of a Hole.  (Read 5520 times)

qbird

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Case study: Digging out of a Hole.
« on: May 26, 2014, 08:08:46 AM »
Age: Husband is 46, I am 44
Income: Husband 59000., Me 25300. Both after taxes
Kids:2, 19 and 16
Cars: 3 all paid for
Expenses:
Mortgage: 2229.00 we owe 208,000. @6.875% property taxes are 687.00
Cable: 175.00
Electric: 175.00
Gas: 114.00
Life insurance: 121.00
Cell: 80.00
CC: 50.00
Gym: 22.00
Student loan: 230.00
Prescriptions: 115.00
Debt: 173.00( medical bills )
Car insurance: 343.00
Gas/tolls: 340.00
Food: 640.00
Spending: 500.00 haircuts, doctors, clothing,home maintenance, etc
Total: 5307.00

Annual expenses:
College 3000.00
Pool 750.00

Retirement
His 401k 10300.00
Mine 10800.00
Savings 1500.00

Debt
Student loans 4500.00
CC 1000.00
Mortgage 208000.00
Medical bills 10,000.
Lien from business 11000.00

I have been reading MMM since November 2012, which has changed our lives. I know things still do not look great but they are a lot better than they were. I need to do something about the mortgage. We had a business that failed hence the lien which stops us from selling and downsizing or refinancing. We bought the house in 2007 for 289000.00 and put 20% down..we owe 208000.00. The house could sell for 240ish. So we need to get rid of the lien. My husband just changed jobs and I started thinking about taking his 401 k and try to make an offer to settle the lien. If we can settle the lien then we have to decide whether to sell or refi...we have been looking to see what is out there..house wise and truthfully there is not much that we wouldnt have to put a good amount of work into. But this house is expensive and we need to make major changes if we do not want to eat dog food in retirement. Your feedback is welcome.












Greg

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Re: Case study: Digging out of a Hole.
« Reply #1 on: May 26, 2014, 08:55:53 AM »
Can you cash in some of your retirements and pay off the lien, then refi? 

qbird

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Re: Case study: Digging out of a Hole.
« Reply #2 on: May 26, 2014, 09:04:02 AM »
thats what I was thinking but really feel bad about taking that money.  However, I see no other way to make the next move which is to deal with the house.  My biggest issue besides whether or not to empty the 401k is whether or not to sell.  In this HCOl area there doesnt seem to be much lower than 200K that doesnt need alot of work or is in a not so great area.

SDREMNGR

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Re: Case study: Digging out of a Hole.
« Reply #3 on: May 26, 2014, 09:04:56 AM »
Your budget is fraught with standard fufu stuff like cable, high gas, extra car, credit card balance, etc.  Read through the forum on the dozens of similar case studies and then post on reformed numbers.  There are lots of low hanging fruit.  Before you are willing to make behavioral changes, the specifics of moving money around are only temporary.  You make too much money to have the debts that you do and that's a spending issue. 

qbird

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Re: Case study: Digging out of a Hole.
« Reply #4 on: May 26, 2014, 09:14:09 AM »
yes, I agree that we still have alot to cut back on.  I am looking for a job closer to home, the tolls and gas are mine.  The extra car is my daughters, she pays for the gas, we pay for the insurance, she takes that over in January. The cable has been a major issue with my husband, not sure what I can do about that. I agree with the credit cards, will work on getting that down.

former player

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Re: Case study: Digging out of a Hole.
« Reply #5 on: May 26, 2014, 09:26:09 AM »
Monthly income $7,025 after tax.
Monthly expenses $5,620  ($5,307 plus $312.5 college and pool).

You have savings of 1,500 and $1,400 extra coming in per month, even on your current expenses.  You have medical debt and credit card debt adding up to $11,000.   Starting by using your savings to pay off the credit card this month, you will have all of those debts gone pretty quickly.

I first misread the lien as $11,000: I bet you wish!  Once you have all debts apart from the mortgage and lien paid, you have $1,623 per month ($1,400 plus credit card payment plus medical bill payment) to put towards your mortgage and lien.  You are both in your mid-forties, and the kids are getting grown.  You have $211,000 in 401(k) (to which I hope you are both contributing match/max) and $32,000 in equity apart from the lien.  Are you paying interest on the lien?  If not, it's not a hair on fire issue, just a "we can't sell the house" issue, and unless you are moving out of your high cost of living area, I don't see selling the house as helping your situation much.

Facepunches

3 cars with gas/tolls of $340 per month?  How much of this is clown car driving? Are the kids contributing financially to their car use?
Cable $175 per month
Cell $80 per month
Electric $175 per month and Gas $114 per month
Gym $22 per month
College: are you really paying for your kid's college while you are still paying off your own student loans?  Does anything seem slightly wrong to you about this?  Do the kids earn any money?  Are they looking out for scholarships for college?
Pool at $750 per year: if you are not getting a lot of use out of it, consider a temporary or permanent retirement for it.
« Last Edit: May 26, 2014, 09:37:26 AM by former player »

frugaliknowit

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Re: Case study: Digging out of a Hole.
« Reply #6 on: May 26, 2014, 09:28:22 AM »
First:  How much are you "in the hole" each month?  Try cutting (ridiculous) expenses to the point where you are reserving cash.  Have a family meeting, explain things to everyone and engage the family.  Work on this for a few months and track everything.  How soon can you get to 8 months expenses reserved?  Maybe you could pay off the lien over time, then refi the house?

Assuming you have decided the house must go now:

Are you both sure you can withdraw the 401K?  Don't forget you will only net around 50-60% (taxes plus 10% penalty).

That being said, here are your choices on the house:

1.  Put the house on the market.  As offers are made, evaluate (with precision) whether you can pay off the lien with the proceeds plus the after tax 401K.  If you cannot, do not accept the offer(s).  If you do accept an offer, wait until the buyers financing is approved and just before closing to pay off the lien with the 401K.

or

2.  Contingent on an attorney consultation, file bankruptcy. 

This might be the best and only way out of the house.  Good people go through this so don't despair.  You went through a business failure and survived.  You collectively have a great income!!  Best of luck to your family.

qbird

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Re: Case study: Digging out of a Hole.
« Reply #7 on: May 26, 2014, 09:49:44 AM »
My husband just started a new job which has increased our income by 1200.00 a month.  That has created the extra per month.  I never thought about just taking the savings and paying off the credit cards, great idea. I did inquire with the 401k, we would receive 8400.00, if i could make an offer of $6000.00, maybe the vendor would accept it.
Former Player, we have a total of approx 22,000.00 for retirement, I did not put the commas in. Sorry for that, so things are not that great when it comes to retirement savings.  You are right about the college, I should concentrate on paying my loans off first, have her take loans.  She does help out by buying books and putting some cash towards the tuition.  She pays for her car, phone, monthly medicine.  She needs to look into scholarships, she is at a community college now, transfer to a university in a year.  I will help her with this. 
 

Greg

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Re: Case study: Digging out of a Hole.
« Reply #8 on: May 26, 2014, 09:54:14 AM »
I'll agree that $175 per month for cable is insane.  For comparison I pay $0 for cable, don't watch TV, but instead watch some things on internet, $30.

$343 a month for insurance? Again seems awfully high. I pay less than half that for 2 vehicles, and home and lifex2.

Utilities also seem high.  My electric bill for 4 people is about 1/3 that.

My understanding of liens is that they aren't to prevent you from selling your home, but to pay the debt out of proceeds,  perhaps the same thing can be done with a refi.  It is $11K?
« Last Edit: May 26, 2014, 10:02:02 AM by Greg »

MDM

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Re: Case study: Digging out of a Hole.
« Reply #9 on: May 26, 2014, 10:15:26 AM »
Must be something I'm missing here.  E.g., former player wrote "I first misread the lien as $11,000" - I reread a few times and it still appears to be $11,000...?

Anyway, it seems you have positive cash flow even with the unnecessarily high expenses others have already listed.  Do the "obvious" (e.g. pay off the credit card immediately, then prepay on the highest interest debt, all while reducing unneeded spending and restarting 401k contributions) and things should be fine.  Ok, easier said than done - but is it really that difficult?

Again, apologies if I missed an extra zero or two somewhere.  See attached for an attempt to quantify the situation, if that is helpful.


former player

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Re: Case study: Digging out of a Hole.
« Reply #10 on: May 26, 2014, 10:16:51 AM »
Sorry, I've been misreading the noughts!

Congratulations to your husband on his new, higher-paying job.  That is what gives you the headroom to sort all this out.  Give him a big kiss for it.

Provided you are not paying or accruing interest on the lien, I don't see the value in taking money out of your retirement accounts to pay it off.  Even if you are paying/accruing interest on it, is it really worth losing tax-free and invested retirement money for?  Do the maths on this one before you do anything.  If it is eleven thousand, with your savings and new income you can pay off your credit card, medical bills, lien and student loan in full within the next 18 months even with making no changes to your expenses.  If you can negotiate a lower settlement on the lien, so much the better.  You can save $6,000 in four months without touching retirement funds.

Without those debts, paying off the mortgage and adding to the 401(k) should happen at a pretty steady rate.    If you can get your utilities bills down and keep an eye on the possibilities for refinancing the mortgage, staying in your current house could well turn out to be cheaper than moving.  It's not so big a hole, after all.



qbird

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Re: Case study: Digging out of a Hole.
« Reply #11 on: May 26, 2014, 10:43:24 AM »
thanks everyone for your replies, you really gave me alot to think about.  We have made lots of strides in the recent past, but it is so helpful having a fresh set of eyes view these issues to help us get to the next level.

Prairie Stash

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Re: Case study: Digging out of a Hole.
« Reply #12 on: May 26, 2014, 11:28:11 AM »
I would challenge you to pay off credit card and student loan within 2 months.  I bet you would love having those gone. It's a pretty small amount with all the excess cash in your budget. 

When I had loans it felt like I got a raise every time one was paid off (4 student loans).  For fun I use to take my annual income, subtract all the interest from the year (mortgage, student loans, CC etc.) and call it my real income.  It was depressing, so I fixed it. Good Luck!

qbird

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Re: Case study: Digging out of a Hole.
« Reply #13 on: May 26, 2014, 11:32:17 AM »
Thanks for the motivating post...We have paid off so much debt so far and it is so inspiring every time I see the zero on the balance sheet!

alsoknownasDean

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Re: Case study: Digging out of a Hole.
« Reply #14 on: May 27, 2014, 06:12:47 AM »
So your mortgage is almost 7% interest? Surely that's a fair bit higher than normal in your country?

I mean, $200,000 at 7% is ~$14K a year of interest, at 5%, ~$10K a year. Better for that money to be in your pocket than the bank's.

That house doesn't seem all that expensive if I'm honest. I'd love to be able to buy a place for $240,000 that's not in the sticks or a horrible area :)

As said, there seems plenty of little things to sort out expenditure-wise.

I've noticed you haven't provided interest rates on your debts. Might help determine which ones should be tackled first.

Would it be worth taking a personal loan (hair immolation, i know) to consolidate all of the debts and get rid of the lien, followed by refinancing the house at a lower rate? Obviously then working on getting rid of the personal loan ASAP.

Honestly it doesn't seem like that big of a hole, certainly not worth getting into your retirement savings for.

Also, are you able to increase your hours in your current job? Are you able to go to two cars? Lower cable plan (or ditch it altogether)? Agreed that $343 a month is a LOT for insurance, although insurance for young drivers is often expensive.
« Last Edit: May 27, 2014, 06:23:34 AM by alsoknownasDean »

qbird

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Re: Case study: Digging out of a Hole.
« Reply #15 on: May 27, 2014, 05:52:04 PM »
The goal is to payoff the lien and refinance to a lower rate. The student loan is at 6% and the credit cards are at 0%.  The house is in one of the best areas in New Jersey, great school system, very safe neighborhood. It is a two story colonial with a huge backyard with a pool. In NJ, our car insurance rates are some of the highest in the country, basically, insuring a young adult is just expensive. I spoke to my husband about the cable and I always get the evil eye...not sure what I can do about it without many tears on his end..lol..yes, he is attached.  I am salary at my job so no OT there but I am putting a lot of effort into trying to find a job close to home to cut down the gas and toll expense, right now my commute is 25 miles one way with tons of traffic.  Thanks for your feedback, it really helps getting a different view on my bills.

Q

Thegoblinchief

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Re: Case study: Digging out of a Hole.
« Reply #16 on: May 27, 2014, 08:14:06 PM »
The food bill can go down a bit. What you really need to watch is that $500 in misc monthly spending.

Shop insurances around.

What does the husband like to watch? If it's shows, see how many are available on Netflix+Hulu. If it is sports, but only a few, look at the sports-specific streaming available online or via Roku. They still cost $$ but will still be cheaper than $175 every month.