Foreclosure | Till Debt Do Us Part

The ability to service your debt

Oct 092008

I remember someone I know telling me about the first time that he received notice from the bank that his mortgage payments were past due. For him it was deeply upsetting. He had a lot of pride and was of the ‘a man’s word is his bond’ attitude. For him to receive something like this from the bank was devastating.

He knew it was coming. He was not ignorant to the ways of the world. In fact the reason he was in debt was because he had taken out a loan to invest in a business. He says it himself that he was trying to be too smart. He was trying to leverage his good credit score and good job to make some money.

Now I don’t know what you think about what he was trying to do. My feeling is that he deserves respect and admiration that he was willing to take a big risk (because we’re not talking small change here) to make money so that he could secure his and his families financial future. Others might argue that he should have left well enough alone as he already had a good job, some savings and a good credit score.

Anyway the fact of the matter is that he got himself into a bind. The business he invested in collapsed and he didn’t get any of his money back. For a period of about six months after the collapse he was okay because he was using his small savings to meet the loan repayments. All his cash ran out and his salary simply couldn’t cover both the loan repayments and the mortgage repayments.

Things started to get tight for him. Eventually it got to the stage where he was borrowing on his credit card to repay his loans. That source of funding eventually ran out as he hit his credit card limit. Somehow he was able to keep all this from his family as he was the one who looked after the finances.

Reality check

He knew the game was up when he received the past due notice from his bank. The sense of failure was overwhelming. Up until that point he had always maintained that once he could service his debt and keep the wolves from the door for one more month then he would be okay.

The problem that he faced was that while he was servicing his debt and living month to month every now and again unexpected expenses would occur. One of his kids might need to go to the doctor one month or his car might need new tyres. It was these unexpected events that pushed his finances over the edge and almost pushed him over the edge too.

His wife had noticed that there was something wrong and thought that he was having an affair. As a result he had to confess to the financial mess that he had gotten himself into. She was relieved that he wasn’t having an affair but upset that he felt he couldn’t talk to her about his problems. The upshot of it was that they decided to work through the financial problems together as a team.

A few adjustments

His wife agreed to go to back to working full time as the kids were now both in school. They figured that she would only need to do it for about eighteen months before their financial situation would be corrected.

Along with this change they made other small but significant changes to their lifestyles that allowed them to gain greater control over their expenses and income. I won’t bore you with the details as I have outlined similar changes in previous articles but suffice to say it involved being more frugal and starting an emergency fund.

They all lived happily ever after. The End.

And moral of the story is what Mike?

Ok the story came to a bit of an abrupt ending. The point wasn’t how it worked out for them in the end. The key point of the story and the thing I want you to think about is how easily he got seduced into thinking that his ability to service his debt was much stronger than it actually was.

His first mistake was that he thought that because he had a good job and a steady income that he could afford to take out a loan to invest in a business. There was simply too much risk involved and as a result when things went wrong his finances started to struggle. He should have used his savings to invest in the business and if he didn’t have the savings then he should have waited until he did have the savings before investing.

His second mistake was not getting help early enough. Pride before a fall. He had a big sense of pride and honour and a misplaced sense that he should be the sole breadwinner. That way of thinking is okay if we lived in the 1950’s but in today’s costly world it is very difficult to get by on one income even if the family is extremely frugal. Had he told his wife earlier on about the problems then thing might not have gotten so bad.

His third and final mistake was that once in debt he came to the conclusion that he could live paycheck to paycheck and somehow survive in the long term. He was living on a financial knife edge and it was only a matter of time before he fell off.

How many mistakes?

Of the three mistakes outlined above I have made them all – over and over again! My biggest mistake has definitely been my misplaced confidence in my ability to service my debts. Too often have I thought that I could earn more or save more or simply just magically pay off my debt each month. As the months would drag on by and I struggled to make the payments I soon would realize that all was not well in my financial story book.

Fool me once shame on you, fool me twice shame on me.

Well it took about eighteen months of trying before I finally began to realize what I was doing wrong. So I’m not sure what you could say about that – fool me eighteen times…shame on???

How confident are you in your ability to service your debts?

This is a question you need to answer as honestly as possible. While you might be able to meet your debt repayments at the moment, project your financial situation forward a year or two. Are you still confident that you will be able to service your debts then? How about it you lost your job? Or if you have lots of unforeseen expenses – would you still be able to service your debts?

If you have even the slightest reservation about your current or future ability to service your debts then now is the time to get real about it. There is no point in hiding from the problem because the longer you hide the more painful the readjustment to both your finances and your lifestyle will be when you do face up to the issue.

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If your bank goes bankrupt your debts won’t disappear

Oct 072008

With all the madness that has been going on over the last few weeks in relation to the stockmarket and the economy it is easy to get caught up in it all. There is nothing but doom and gloom pouring out from every TV channel and news website.

The simple fact of the matter is that you have nothing more to worry about than usual and here’s why.

If you are in debt and owe the bank money and that bank goes bankrupt then you STILL owe the bank that money. You do NOT have your loans written off – in fact your loan is seen as an asset of the bank because it generates income for them. As a result your loan stays in place.

Unless you have thousands of dollars invested in the stockmarket, then your main concern should still be to repay your debts. On the other hand if you do have thousands of dollars invested in the stockmarket I would ask you, retirement funds aside, why haven’t you used these funds to pay down your debt?

No matter which way you cut it, your number one focus should still be on debt repayment.

Job losses

This is a legitimate concern but given the unstable nature of working life these days it was probably a concern you had long before now. It is true that if things continue the way that they are going then there will be a lot of people losing their jobs and not just on Wall Street. Even as it stands there are thousands of people who are losing their jobs each month.

To those of you who still have a job and are concerned about losing it I would say get your house in order. There is a reason why the motto of the Boy Scouts is ‘Be prepared’. I wrote a previous article called ‘How long could you survive if you lost your job?’ that will help you understand what you need to do in order to weather the approaching storm.

Stick half of your head in the sand

This is the best advice I could give to someone who is worried about what is going on in the world today. I give this advice on the understanding that you have your financial affairs in order and that you are focusing on paying down your debts and building an emergency fund. I wrote an article called ‘Stop talking about recession, I don’t want to know’.

In this article I outline how I actually made some money during a recession by ignoring the negative financial self talk and hiding away from the bad news. It was a case of ‘ignorance is bliss’.

Nothing changes much

If you are on a debt freedom journey then do not allow a recession or talk of recession throw you off course. It is now more important than ever to be seeking debt freedom. At least that way if you are debt free (or at least on course to being debt free) and things get really bad you can be safe in the knowledge that you are in a much better position than a lot of people are. Ultimately whatever happens it is how well prepared you are that will determine what shape you will be in when you come out the other side.

Payment shock – and how to avoid it

Sep 032008

Taken from Investopedia.com

Payment shock

The risk that a loan’s scheduled future periodic payments may increase substantially. Payment shock can be the result of several things, including the expiration of an initial or temporary start interest rate (sometimes known as a teaser rate), the end of a fixed-interest rate period, the end of an interest-only payment period, an increase in an adjustable-rate mortgage’s fully indexed interest rate or the recasting of a payment option ARM.

My payment shock came in the form of an introductory low interest rate offer on a credit card. I had transferred the balance off a couple of my credit cards onto a single credit card that had a really low introductory offer. The offer was 0% for six months on balance transfers. I jumped at the chance.

Six months later I was so use to getting my monthly statement with the same balance on the account that I didn’t even bother opening the statements. I wasn’t using the credit card to buy anything so the balance wasn’t moving. I got lazy. I sailed through the six month period without even realizing that it had ended.

About three months after the introductory offer period ended I went to check my credit card statement. I got what I now know as a ‘payment shock’. My credit balance had shot up in the three months since the end of the introductory offer period. I was now paying interest on interest. I was very alarmed and annoyed that I let it happen.

I learnt a hard lesson and I learnt all about what it means to suffer from “Payment shock”.

That said I think I was lucky. I am currently renting but about two years ago I was looking to get a mortgage. There was some scary stuff out there. Interest only options with teaser rates. From my experience with the credit card payment shock I was in no rush to be seduced by these low monthly mortgage payments. From what I could see most of these low rates only last about 2 years. Then they reset and you have 28 years of trying to pay the much higher rates. I held off and I’m glad I did.

I suppose that was what the whole subprime meltdown was all about. People who could not necessarily afford the standard mortgage payments were seduced by these low low teaser rates and some slick salesmanship.

The offer was simple and I imagine it went something like this

“You can have the home of your dreams and it will only cost you $600 per month, then when the rate resets in a couple of years you can refinance or sell as your home will have gone up in value.”

How could you not be seduced by this? I mean here was your dream handed to you on a plate for a very reasonable and manageable monthly payment.

When you take it at face value it looks like an amazing offer. You get what you want for a very little monthly outlay. Many people bought into this and I can completely understand why.

Unfortunately the danger lay a year or two down the track. Like what happened to me I imagine that a lot of people got comfortable and use to making the monthly payment and not even thinking about the rate reset. Like me they were in for a very nasty payment shock.

I’ve read stories online about how people were seduced by the low interest only rates only to find that they simply couldn’t afford the repayments once the rates reset. Here is a link to one such story from the New York Times – Mortgage Crisis Spreads past subprime loans.

How to avoid payment shock

Hindsight is 20:20. When you look back on an event that has occurred it is so easy to say ‘I should have done this or I should have done that’ but in reality the event is gone forever and there is no point beating yourself up about something that you cannot change.

That said there is still value to be had by analyzing past mistakes. The value is to learn from your mistakes and the mistakes of others so that you are less likely to repeat them.

I learnt a couple of lessons from my payment shock.

The first lesson I learnt is to always go into these things with your eyes open. I knew what I was getting into with the low introductory credit card rate but what I wasn’t 100% clear about was when exactly the period ended and what, if any, obligations I had once the period ended. To be honest I wasn’t even sure about what rate I would be paying once the period ended.

So my advice is to do your homework completely before you enter into any sort of introductory or low interest offer. There is no such thing as a free lunch and the more you know and understand about the offer the better you will be able to evaluate it and decide if it is suitable for you. Use the power of the internet to connect with other people who may have already signed up for the offer and find out what their experiences have been.

One key piece of information that is crucial in your decision is whether or not you can afford the repayments when the rate resets. So you need to find out exactly how much the new rate will be in a worse case scenario. If you have a mortgage then this means calculating how much you will have to repay when the rates reset but also assuming a worse case scenario that the interest rates in the economy will rise as well. Then ask yourself if you can sustain that level of repayment indefinitely or will it be a strain on your finances?

The second lesson I learnt is to use the time of the introductory offer to good effect. In the six month interest free period I sat back and did absolutely nothing to tackle my credit card debt. I should have looked on this as a window of opportunity to make serious inroads into my debt so that when the interest free period ended there was no debt for the credit card company to charge interest on.

If you have a low interest period on a loan, credit card or mortgage then use it to good effect because you can be certain that when the interest free period is over you will face higher repayments.

I can understand why someone buying a house would like to avail of the interest only option. When moving house there are lots of new things that may need to be bought and unforeseen expenses that can occur. That said I think that it would be prudent to start working backwards from when the introductory period ends.

As mention above you should find out what the new repayments will be after the introductory offer period ends. With this new worse case scenario repayment figure in mind you should start budgeting your finances accordingly.

For example if you currently repay $600 on your mortgage but you know that in 18 months that it will reset to $750 then you should start to budget your current finances on the basis of the new figure of $750 even if it is 18 months before the new rate kicks in. Start paying the new rate of $750 now. Don’t wait for the rates to reset in 18 months.

The logic is simple, by the time the new rate kicks in you will have adjusted your finances accordingly and the payment shock will be neutralized. In effect you are bringing the payment shock forward and allowing yourself to deal with it on your own terms.

In the example above there is a difference of $150 between the current payment of $600 and the project rate reset figure of $750. When you start to budget your finances using the new figure even though it is 18 months before you actually need to start paying $750 you should save the difference of $150 and place it in an account only to be used to help you smooth out the transition to the new higher rate.

Payment shock – the real key to avoiding it.

In my article called ‘Prudence in all matters relating to your debt’ I made the point that to be prudent with your finances you should expect more bills and expect less income. To avoid payment shock you should apply the prudence principle. If you estimate that your repayments after the rate reset will be $750 then you should budget for $800. By doing this you are allowing for any hidden or unexpected charges.

The only real way to avoid payment shock is to go for the fixed rate option where you repay principal plus interest each month. You know exactly what your repayments will be for the entire period of the loan. It may cost you more initially but in the long run you avoid any payment shock that could throw you financial plans into disarray.

Finally if you are caught on the wrong side of a payment shock like I was don’t just sit there looking at it. Get the calculator out and start doing your sums. Contact the lender and ask for help. Research your options on the internet. Take action. Get moving on it and keep moving on it. Come at the problem from different angles. More often than not a few choice cuts in your budget can help soften the blow.

Just remember that the faster you move the less of a shock it will be.

Walking away from your debt

Jul 302008

My initial reaction to writing this article was simply ‘don’t go there’. Part of me didn’t even want to entertain the idea but another part of me wanted to give you a chance to decide for yourself. The goal of this website is to provide information and motivation to get you moving on repaying your debt. To discuss walking away from your debt is to go against almost everything that I have written on this website – however recently I have had something of an epiphany.

Before I go on I want to point out here that the main focus here is walking away from your mortgage not credit card debt or unsecured loans.

Yesterday I read an article on the BBC website called ‘America’s house price time bomb’. At first I thought it was going to be the usual parade of facts and figures about the number of homes foreclosed that we are all too familiar with. Up to a point that was the case but then the article talks about a woman who bought an apartment in California in May 2006.

The woman bought the apartment in May 2006 for $500,000. This year her apartment is now worth $300,000. She still owed $500,000 on the mortgage. She had negative equity of $200,000. The interest rate on her mortgage had recently increased. The interesting thing was that she was a well paid professional who could easily have afforded to make the new higher repayments. Instead she simply decided to walk away from her mortgage. By her estimates it will take about five years for her credit record to get back to where it was before she walked away.

The way she justified it was that it didn’t make financial sense for her to continue paying a $500,000 mortgage on a house worth only $300,000. She asked the question “Is the bank going to pay for my retirement because I was a good girl and paid my mortgage”.

I did some further research about walking away from your debts and I came across another article on CNN.

The thing that really interested me about this article was the comments section – when is it okay to walk away? The comments that were posted represented all sides. Those who favoured walking away as a possible solution to debt and those who were against it – it is well worth reading the comments to get a feel for the general opinions on the subject.

I reckon that the biggest thing that prevents people from walking away from their mortgages is the social stigma associated with it. People don’t want to be seen as a quitter. However according to the BBC article there seems to be a change in this attitude. There is growing acceptance of the fact that the housing market is on a serious downward trend and that it’ll likely be years before it recovers. The pervasive attitude now seems to be that people should do what is best for their financial interests.

As the need evolves so do websites to cater for that need – one such website is youwalkaway.com. I’m not in anyway recommending this website I am just letting you know of its existence.

So now for the hard part – where do I stand on the issue?

Almost every time that I write an article on debt and repaying debt I make some reference to personal responsibility. We are all responsible for our own individual actions. What this means is that if we have a debt problem then it is up to us to solve that problem whatever way we can.

I don’t know you personally and I don’t know your financial and personal situation but if you are reading this the chances are your financial situation is not good. If walking away from your mortgage is your way of taking responsibility for your debts then so be it. It should however be the option of absolute last resort. You have to give repaying your debts your best shot. In years to come you don’t want to be looking back and regret not trying harder to save your home.

Fortunately I’m not currently faced with a debt situation as emotionally hard as foreclosure so perhaps I’m not the best person to be asking for his opinion on the subject. I’m sure I would be singing a different tune if I was faced with foreclosure. I’ll admit that prior to doing research on the subject I would have been in the ‘don’t walk away camp’ but I’m now of the opinion that some people may have no other choice and it is in their best interest to walk away. I’m sure it’s not a decision they take lightly. To those who are judging the walkers I say try walking in their shoes for a while before you make any judgements.

Motivation to act on your debt

Jul 152008

I’m generally not into using scare tactics to motivate. I’m much more of a carrot than a stick type of person. My attitude is that you attract more bees with honey than vinegar. I have an encouragement philosophy when it comes to motivating. Rewards and gold stars are the order of the day.

However every once in a while I tend to go over to the dark side and use scare tactics. I don’t like doing it but I sometimes find it extremely effective. Often when I am trying to motivate myself and others I find that the softly softly approach only gets you so far. The results are much better when I stop being so nice and I focus on getting the job done by whatever means possible.

So now it is your turn.

Up to this point I have been encouraging you to tackle your debts in a nice positive way. Telling you that it will be alright and that everything will be fine if you just tweak your budget a bit. When in reality if you are not moving towards your goal of debt elimination and if you are not taking serious positive action then you are heading for trouble.

They say you have to be cruel to be kind and I think this is definitely one of those situations. I’m not doing this to hurt. I’m doing this to scare you into action.

I want you to read the following articles and imagine the torment these people must be going through. How tough and difficult life has gotten for them. I’m not trying to belittle them in anyway I simply want you to look at their situation and how it got so bad for them. I want to shock you out of your mental paralysis when it comes to your debt. Debt can happen to anyone of us and when the consequences come they tend to come thick and fast.

The Foreclosure Story Number 2: $136,000 a Year Income to Foreclosure.

Foreclosure, a personal story

Tent city

California town creates parking havens for homeless

Now that you have read the articles I want you to use the fear of those situations to motivate you to take action NOW. Every minute you wait means that it is a minute longer that you have to spend in debt. Make that call, find that bank statement, pay that bill. DO IT NOW.

Fires and foreclosures – not the smartest way out of debt

Jul 072008

Faced with foreclosure people will do allsorts of things to stay afloat. The need is real and pressing especially with the bank breathing down your neck. They say that desperate times need desperate measures and I couldn’t agree more. However the line has to be drawn somewhere and I think the line has to be drawn at illegal acts such as fraud and arson.

There has been a worrying trend forming in the last year or so. Anecdotal evidence suggests that some homes that have been up for foreclosure have been torched by their owners. Recent media reports suggest that while no hard evidence exists of a link between the rising foreclosure rates and the increase in the number of arsons there is a feeling that the two are strongly connected.

Arson – why would some one do it?

Simple really they can see no other way out of their debt or the ways that they do see will take too long and be too hard for them. They look on arson as the easy option. One little fire and puff my debts go up in smoke. They hope that the insurance company will pay out on the burnt down house and the money can then be used to solve their financial problems. If only it was that simple.

Some people adopt the attitude that ‘If I can’t have it then no one else can have it either’. This is the attitude of someone who is both desperate and angry. Both emotions that I can understand and relate to but I could never condone burning down a house to get back at someone or to solve your debt problems. Its just plain wrong.

Fire investigators can spot arson easily – what makes their job easier is if there is a big ‘for sale’ sign at the front of the house. Straightaway whether they admit it or not they will be thinking that it is another case of arson.

There are a few other telltale signs that the fire was as a result of arson. If pets and expensive electronic equipment were removed at the time of the fire then it can be obvious that something suspicious was going on. Some people stop paying all their bills except their home insurance – if this doesn’t scream arson then I don’t know what does.

Generally speaking people who do start fires do so out of desperation and do not cover their tracks very well. As a result the chances of getting caught for arson are very high.

Not only does arson NOT solve your debt problems it could also ruin your life. Aside from the very obvious dangers that come with playing with fire you could end up spending a long time in prison if you get caught. The simple fact of the matter is that you will get caught if you burn down your house or burn out your car. The police and fire investigators aren’t stupid. They spend all their working lives investigating crimes like arson and fraud.

The ironic thing is that a lot of people think that insurance companies will just pay out to avoid the costs of having to investigate and the hassle of bringing someone to court. This could not be further from the truth. It is in the best interest of the insurance company to investigate each suspicious fire. The reason is simple – if they set a precedent of not investigating fires then everyone will start doing it. Insurance companies need to be seen to be tough when it comes to fraudulent claims and arson.

What’s the alternative?

There are always alternatives to arson for profit. If things are so bad that you are considering arson then I think that bankruptcy is by far the lesser of two evils. Bankruptcy may set you back a couple of years in terms of your financial situation but arson can send you to prison. I know which one I would prefer.

Be safe in the knowledge that if you do burn down your house or your car that you will get caught. The simplest thing to do is to rule it out as an option and focus on something that will solve your problems. Talk to your lender. See if they can do anything.

If your lender can’t help you then research your options online. There are thousands of people facing the same difficulties as you are. There are hundreds of solutions and viable ways out debt. This website contains many ideas on how to eliminate your debt and the internet is filled with great ideas to help you. So I say start researching and learning how to get out of debt legally and put those matches away.

Foreclosure of a dream

Jun 192008

I recently heard the sad story of a single mom who had her home foreclosed. This is a story that has become depressingly familiar and has been repeated thousands of times over and will be repeated thousands of times in the next few years. No two cases are exactly the same but they all seem to have a common thread running through them. However this story is worth repeating if for no other reason than to show how you can be seduced by easy credit only for the dream to turn sour. For those of you facing a similar situation take strength from the knowledge that you are not alone and that the mistakes you have made were not necessarily all your fault. For those of you in debt take a warning from this story as to how bad things can get if you do not face up to your problems now.

To protect her identity we will call her Michelle. Now Michelle came from a disadvantaged background to begin with. Her Dad left home when she was young and her Mom struggled to raise her and her two brothers the best she could. Michelle grew up with strong principles of right and wrong and despite her background she did well for herself.

Michelle was a hard working single mom. She had a job in a local company doing administrative work. She enjoyed her job. In spring 2005 she spotted an advert for mortgages. What caught her attention was the fact that the mortgages on offer were ‘no money down’ – she didn’t need a deposit or any assets to get the mortgage. Too good to be true.

Initially she was worried about being able to meet the mortgage payments and the fact that she had a spotty credit history due to some late payments on an auto loan. However when she called the mortgage broker she was assured that she would be able to afford the monthly repayments and that her credit history wouldn’t be a problem. In fact she was quite pleasantly surprised at the low monthly payments. This of course was to be her undoing. The mortgage broker either didn’t mention the rate reset on the mortgage or mentioned it in terms so obscure and alien to Michelle that she didn’t understand them. Either way a couple of years later Michelle was in for a nasty shock.

With tears of joy Michelle took the keys from the real estate agent and opened the door of her new house. For two happy years Michelle enjoyed her home. It was no longer just a house to Michelle it was her home. She made a great emotional investment in it. She spent every spare moment she had working on the house. It was her pride and joy and it was a safe place to bring up her young son.

In June 2007 Michelle received a letter informing her that her mortgage rate was to be reset to a much higher rate. Her monthly payments went up by $300. Like so many other people she was stunned. She was not expecting such a large increase in payments but due to her poor credit history she was charged a higher rate.

To make matters worse she was already behind on another loan and was getting letters from the bank about it. She did have a small amount of savings but this was simply eaten up by trying to meet the new higher mortgage repayments. It wasn’t long before Michelle fell behind in her mortgage payments. Her situation got so bad that in November last year her home was foreclosed. Michelle was devastated.

Michelle’s story is similar to so many other stories of foreclosure. All that Michelle wanted was a home that she could raise her son in and enjoy life. She had a dream and that dream was home ownership. In reality what she got was a nightmare.

What are the lessons to be learnt? Hindsight is always 20/20 and people can always tell you what you should have done after the event has happened. However there is value to be had from learning about other people’s mistakes. There were a couple of obvious mistakes that Michelle made that could have been avoided.

The biggest mistake Michelle made and probably the single most important thing she could have done was to learn more about her mortgage and about personal finance in general. It doesn’t matter what state your finances are currently in, the more you learn about personal finances the quicker you will solve your financial problems. Financial education is the single most important thing that you can obtain. If you have any spare cash invest it in yourself and in your financial education. You need to know as much about personal finance as possible so that you won’t be taken for a ride.

In Michelle’s situation it was not properly explained to her about the rate reset but whose fault was that? Was it the mortgage brokers? Or was it Michelle’s for not knowing enough about mortgages to ask the question?

In reality Michelle should never have been approved for the loan. The lenders were too easy with the credit and in a lot of ways the banks and financial institutions have no one to blame for their current problems only themselves. But that’s not the point. The point is Michelle was given a loan she clearly should not have qualified for. This was unfair on her. She was given the dream only for it to be snatched from her two years later.

The housing market for people like Michelle was one giant Ponzi scheme. Michelle just happened to be a willing victim. I know some of you reading this will say ‘good enough for her’ but I think you are missing the point. Michelle wanted the dream of a nice home in a nice area and a secure future. Don’t we all want something like that? Who is to say that we might not be next?

Till Debt Do Us Part – Pay off debt fast