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Live in money pit house, too much debt, live hand-to-mouth, what to do?

Dear Dave,

I’m single, 32 years old, owe $9,000 on my car and $10,000 in credit cards and student loans. Now I’m seriously in the hole because the house I bought last year has turned into a money pit. I’ve put every bonus, refund and any extra bit of money I’ve earned in the past 18 months into urgently needed repairs (new roof, rotten flooring, electrical problems to name a few). Now I find myself living hand-to-mouth without any savings, and I even had to get a small home equity line of credit to pay for the most recent house repair (new wiring to bring it up to codes).

I can’t sell the house now because virtually everything has been fixed and I couldn’t rent a place for much less than I pay now. I’m told that refinancing won’t help me, because I’ve got a 6.25 percent interest rate on a 30-year mortgage and my payments are only $642. I am a professional who works 50-55 hours a week, so I cannot possibly get a part-time job. I know that I should pay the highest interest cards/loans off first, but I don’t even have extra money to do that right now. I am generally very frugal and I really don’t know how to cut back any further.

Where do I start? Thank you very much in advance for any advice you may offer!

Lacy

Nashville, Tenn.

Dear Lacy,
I can understand your frustration. You seem to be someone who really thinks of options financially and sincerely tries to do the smartest thing. However, you are at the point where you need to step back and consider the option of change. You failed to mention how much you make during those 55-hour workweeks. Is it a good salary? Could you get a job somewhere else making better money? While you think about that, I strongly suggest that you reconsider taking a part-time job. Yes, you work a full week. But, I can tell you from experience that when you really want something, you need to go at it with intensity. If working another 20 hours a week will get you out of debt so you are not living “hand to mouth,” it would be worth it.

Above this, there are still things you can do. You ruled out renting because you wouldn’t be able to rent for less than your mortgage payment now. You fail to take into account the equity you have in the house, if any. If you were to sell your house, you could use the money to pay off your mortgage, the home equity loan and hopefully your credit card, car payment, and student loans. Okay, let’s be realistic! Your house is probably not worth enough to pay off all these debts. Still, you will get more for it because you’ve fixed it.

You’ve only lived in the house for one year, and from what I see you were probably not financially ready to take on an investment of this size. If you sell the house and pay off some debt, you can rent for a while. This will relieve you of the headache of owning a house, which you’ve experienced, and allow you to focus on paying off your debt and building up savings. I also know for a fact that in Nashville you can get an apartment for less than $650 per month. Even if it were $600, you would be saving an extra $600 each year. With that and an extra job bringing in another $10,000 per year, you can pay off these debts! And when you start paying off these debts, I always suggest paying smallest amount to largest, regardless of interest rate.

Lacy, I want you to enjoy life. I don’t want you to live constantly just getting by. But,
in order to get to that point, you need to get out of the mess you’re in. This may require one, if not all, of the changes I’ve suggested. You should take advantage of your singleness and your vitality and get a hold of this before it gets a hold of you.

Dave


How does settling credit card look on your report?

Dear Dave,

When you settle a credit card for less than the amount, how does this reflect on your credit report?

Michael

Portland, Maine

Dear Michael,

Your report will show as ‘settled in full’ if you arrange that it say that. That is part of what you need to get in writing when you settle the debt. The statement ‘Settled in full’ means that the debt was paid, but it was an amount that was agreed upon instead of the original amount due. If you were to try to buy a house for instance, the lender would look at your report and see that you didn’t pay the whole debt. They will also see that you didn’t dodge the debt, so it isn’t a bad debt, but you didn’t pay the entire amount, either. You got in trouble and had to work out a deal. It is a gray mark on your credit; it’s not a positive thing at all. But it’s not something that will keep you from getting a house later. ‘Settled in full’ is what needs to be reported so make sure that is what they are reporting.

Dave


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