Increasingly we are seeing more families facing a financial crisis because of their inability to make mortgage payments. The reasons vary from unemployment to too much credit card debt, reductions in salary caused by overseas competition or significant changes in cost of living. Many people are struggling in today’s economy. The question of course is, “What are the options for the family?”
The first option is to sell the home so as to have a more affordable housing expense. Many times homeowners are reluctant because the home would sell below what the family originally paid. This would obviously result in the seller losing money and leave the mortgage company with an unsecured loan for the remainder of the debt. We would call this type of sale a short sale. For such a sale to take place, the mortgage company would have to agree. The homeowner would then have to pay off the unsecured portion of the debt. The advantage would be to protect the family’s credit rating and avoid bankruptcy.
In some cases the mortgage lender will take a hit on the unsecured portion of the debt, up to 100% of the unsecured amount, to avoid the cost of bankruptcy. If the lender does take a hit, it can result in the issuance of a 1099 to the homeowner for the phantom income, resulting in an income tax on the unsecured portion of the loan. The tax of course would be less than the repayment of the loan. On a positive note, there are some situations where the tax could be avoided.
There are rescue funds of up to $3,000 available to those in Ohio. Not everyone will qualify, but for certain situations in which a family is behind on their mortgage payments, funds may be available. It is imperative that you can be rescued with the additional funds. They are not inclined to put good money into a bad situation.
A third option is to file bankruptcy. What hurts the credit score most are multiple late payments. If this is an option to be considered, do not drag out the process if you see that you have no other choice.
Another, and possibly a more fruitful option, is to take advantage of our Saving Without Sacrifice process. We recently had a riteree come in who was struggling to keep her home. Through our process we were able to identify savings of $500 a month on her $27,000 annual income. It was more than enough for her to avoid foreclosure but because she waited too long, some of the savings could not be realized for one year.
These are tough times and with some of the proposed changes in government we can only see more difficult times ahead. We encourage you to be more proactive in reducing your living expenses. We would consider it a privilege to be part of your solutions to reduce your monthly costs.
Robert Ostrander, CFP
SWS Advisors, Inc.
