There are a number of tools at play when it comes to the goal of shedding debt. In the housing sector, we have “foreclosure,” “short sales,” and “loan modifications.” In resolving credit card debt, we have “debt settlement” or “debt resolution” as I like to call it. The tools used depend on the task and the circumstances. A carpenter will sometimes purchase 2” x 6”’s and cut them to size, with drywall and sanding next, followed by a molding with paint or a cover to finish. Sometimes, however, a different mix of tasks and tools are needed for a particular job. In an office setting, walls are often pre-fabricated and metal studs are used instead of wood. Thus, a different process and mix of tools are used.
The process of shedding debt is no different. It is a process and the specific circumstances you face will dictate the order and mix of tools employed to accomplish the task.
So how familiar and how much do you need to know about the tools? I believe you need to know the basics – as to how the tool is used and what it can accomplish. By analogy, a carpenter needs to know what type of situation is correct to use a circle saw and how to use it. It is not necessary for him to understand the history, physical composition and manufacturing process of the particular saw. My goal is for you to understand the use and process of the Tools – without boring or exhausting you with historical detail or excessive and useless information.
So, let’s open the tool box and see what we have:
- Bankruptcy – Chapter 7, 13 & 11
- Short Sale
- Debt Resolution
- Loan Modification
- Tax Relief
UNDERSTANDING THE FORECLOSURE PROCESS
Reprint from Had Enough (soon to be published)
with permission of Ken Gross Copyright 2009
I hope you’re asking – why does he have “foreclosure” listed as a “tool.” Foreclosure is the process by which the lender takes the property back from the homeowner or forces the property to be sold at auction to the highest bidder thereby causing the homeowner to lose their home. So how can this be a tool? The answer is depending on your situation and the state you live in – the best strategy with regard to the house you’re under water in is sometimes not to keep the house. If the mortgage far exceeds the market value of the house and the lender will not modify the mortgage so that the principal of the mortgage loan is approximate to the house’s value, you are smarter to get rid of the house and the mortgage and replace it with a home equal in size and personal appeal but at the market price.
VIEW YOUR HOUSE AS AN IMPORTANT ASSET – NOT AS YOUR LIFE ITSELF
THE HOUSE IS NOT THE HOME
Your “home” is the abode you live in. It includes the memories, the people, the energy of family and, of course, emotion. Your “house” is the physical asset, the structure which you own and which is typically encumbered by a mortgage to a lender. My point is that if you are underwater on your house – a valid goal is to move your “home” to a different site and leave the “house” that is underwater. For some, this is a difficult coin to swallow. Staying in a house that is way underwater is throwing away your chance to accumulate savings for retirement.
Additionally, there are many people who are presently living in houses with mortgages that they just can no longer afford for a variety of reasons. They may have stepped to high up the ladder with a no doc, no interest loan while riding the market bubble, or they may have incurred an income loss due to job cuts or a business failure. The practical reality is that you need to be in a home with a mortgage payment you can afford that allows some savings for the future. Though in the past, an argument could be made that savings and growth will come from the appreciation in market values, that argument holds little, if any, water in the present and foreseeable future climate. The reality is that there is no point in attempting to modify a loan if the gap is too wide. We must all face the facts and the music in certain respects. The 90’s and 2000’s were a time when America rode the RECC bubble. The what? The Real Estate Credit Card (“RECC”). RECC is my acronym for what we now have left – which is the train RECC! During this twenty year period, no doc loans (no documentation to justify the borrower’s ability to repay the loan) flourished, as well as interest only, subprime lending, 125% loan to value financing and the rest of the wild gizmos that made it so easy to purchase or build a home – even if you could not afford to pay for it. On top of that, if you had a track record of paying your bills on time, it was easy to obtain anywhere from $25,000 to $200,000 of available credit on credit cards.
The RECC bubble created incentives for people to buy houses in excess of what their income allowed. The expectation was that the house could be refinanced to cover any shortfalls or if necessary, flipped at a hefty profit – with the profit rolled into the next home – allowing the homeowner to enjoy a nicer home and bigger asset with a mortgage that was affordable. It was a nice concept and worked for a while for many people. Unfortunately, we now know that the concept failed.
We may not have known it then, but we certainly do know it now. The RECC bubble has burst and all that we have left is the “reccage.” The wake of the fallout is far bigger than anyone would have imagined. Industries such as residential and commercial development have been destroyed. A builder simply cannot build a house that is price competitive with the glut of houses on the market due to foreclosures.
The important point here is to learn from the past and then going forward your goal should be to acquire a house that you can afford to pay for and maintain. The days of 10% annual increases in value are gone. It is simply not realistic to think we are going to reinvent the bubble and then ride it again in the near future. America as a country does learn from its mistakes. In this case, governmental oversight and regulation designed to protect against the RECC and debacle also means there should be no reasonable expectation of sustained super price escalation on a wide spread basis.