After getting over the emotional hump of depleting her savings and losing the multifamily property to foreclosure, Barrett is working to downsize her more than $230,000 debt load that includes two mortgages totaling $197,000 on her condo (which is underwater), $9,600 in credit card debt, $31,000 in student loans, and a $6,300 balance on her car loan.
Fortunately, Barrett has about $800 per month in discretionary income and is able to pull herself out of her hole but she needs clear direction. “I feel like I have enough cash where I can use the extra money to pay down the other debts. I don’t want to remain in debt more than four years. But I want to be realistic with that goal,†says Barrett, who would like to have her car and credit card paid off by the end of 2013, save $21,000 in an emergency fund by the end of 2014, and pay off her student loans by 2017.
“How do I continue to pay my bills with the big picture in mind, while keeping a comfortable lifestyle for my son and I?†asks Barrett.
The Advice
Black Enterprise and Jaime Wright, a district vice president at AXA Advisors, offer this guidance to Barrett to get her back on a path of wealth creation:
Take baby steps. Barrett should take a slow and steady approach to rebuilding as to not bite off more than she can chew and then lose hope. “She should take a two-prong approach: pay down the revolving debt [credit card] and build up her cash reserves. She indicates in her budget that she can put $400 toward each goal,†notes Wright. If she follows this advice, in 24 months, Barrett would have $9,600 in emergency savings or four months’ expenses. She should apply the $2,000 contest winnings to her savings. That is a reasonable goal, Wright says. After she pays off the credit card, she should add that $400 to her emergency fund so she can be prepared in case of another layoff with more cash on hand, so she doesn’t end up taking out another personal loan or borrowing from her retirement savings. In the end she lost her home on top of adding $15,000 to her personal debt load and shrinking her 401(k). It doesn’t make financial sense to chase lost equity. Know when it’s time to walk away.
Pay off other debts as agreed. Barrett wants to pay off her car loan by 2014, but Wright says, “She need not pay off the car on an accelerated basis, she should simply make sure her payments are timely.†If she continues to pay $280 per month her car will be paid off by 2015. She is currently paying $205 per month on her student loan debt on time. She should continue to pay her bills in a timely manner, which will improve her credit score more than paying off all of her debt. It demonstrates she can handle making payments over a time period as well as longevity, key factors in building good credit.
Apply for mortgage modification. “Barrett’s mortgage rate is going to increase from 3% to 6.6% in two years. I would suggest she immediately seek modification of those terms from her lender,†advises Wright. Furthermore Barrett owes around $30,000 more on her condo than it’s worth, so Wright also suggests “she should maintain the property as the rental income covers the mortgage.†He suggests that she consider selling in the event that the modification doesn’t work or if she can’t cover her additional rate increase. “As the market stabilizes she can either consider refinancing or selling the property in the future.â€
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