Overwhelming Debt Problems
August 8, 2005 10:48 AM   Subscribe

A friend of mine has just taken on a large amount of debt since splitting with his girlfriend. What can he do to keep on top of it?

A friend of mine recently split with his live in girlfriend who had lost her job, leaving him to pay her half of their mortgage. Additionally, debt collectors are after him for her car loan that she is not paying, for which he cosigned. She's agreed to give him the car, but he can only sell the car for less than half of the outstanding loan debt. On top of this, he's struggling with trying to find a way to pay his mortgage and the other monthly bills he has (such as his own car loan, his school loans, and credit card debt).

He'd prefer not to enroll in credit counseling, but he is in need of some sort of financial help/consulting before this snowballs out of control. He is also set on keeping his house, as he just purchased it less than a year ago.

Does anyone have experience with something like this? Any suggestions of what he can do to stay on top of this? Thanks.

P.S. This is in Buffalo (Upstate) New York, if that helps at all.
posted by jeresig to Work & Money (20 answers total)
Debt consolidation might help. You don't have to go to Credit Counseling for that -- his own bank may have debt consolidation loan opportunities. A home equity loan or second mortgage might be an option. In any case, I would think the very first step would be to talk to his own banker or a financial advisor. A small consulting fee from an advisor could pay for itself many times over.
posted by Miko at 10:52 AM on August 8, 2005

School loans are probably the easiest to get a defer or get a forbearance on -- start there.

Get a roommate to help defray the mortgage costs, or rent out the entire house and move into a cheapo apartment.

Check out these resources from Nolo Press.

Get rid of both cars and take the bus for a while.

Get the girlfriend a job.

Get a second job.
posted by footnote at 11:13 AM on August 8, 2005

Some sort of consolidation loan would be ideal, if its possible for his situation. Otherwise, he should make absolute minimum payments on everything except the smallest debt. Heap anything extra on the small one until it is paid and then move to the next debt. If a monthly bill must go unpaid, may it never be the mortgage. Also, he should do everything possible to get rid of car payments, even if it means doing a short sale and making up the difference with borrowed money. Take public transportation or buy a cheap old beater that he can drive until he's out of this mess.
posted by curlyelk at 11:42 AM on August 8, 2005

And yes, get a second job.
posted by curlyelk at 11:42 AM on August 8, 2005

curlyelk's suggestion makes sense emotionally, psychologically, sticktoitively, etc, but not economically.

Surplus payments should go to highest interest rate.
posted by Kwantsar at 11:45 AM on August 8, 2005

You mention a split with the girlfriend, and they were on the same mortgage and car loan... your friend should get rid of any joint accounts -- especially credit cards -- immediately. Even if he can't pay 'em down, he should get them shut down so no further charges can come in. I had a friend who just had a nasty experience with new charges run up on some joint cards by his ex.

Even if things seem congenial with the ex, you never know -- if she's in bad financial shape, too, it might be too tempting to just run up a few more charges on those joint cards.
posted by gurple at 11:54 AM on August 8, 2005

On a smaller scale, he should cancel anything that isn't mandatory for living, for now. Such as cable tv, netflix, internet access, fancy telephone add-ons such as caller id, and the cell phone. All those monthly obligations add up in a big way, and he's in a place where he needs to maximize every opportunity to get ahead.
posted by JanetLand at 11:55 AM on August 8, 2005

If bankruptcy seems like an unavoidable possibility he needs to look into it now before the laws change.
posted by Carbolic at 11:55 AM on August 8, 2005

Make sure he knows the terms of the mortgage -- is there an acceleration clause if he misses a payment?

Buffalo has a foreclosure prevention program -- not sure if he'd qualify.

This pamphlet issued by New York state has a few numbers for advice on mortgage issues -- also gives the possibility of getting an emergency assistance grant to cover mortgage payments (not sure if this benefit is available outside of NYC or where fraud's not an issue.)

Can he ask the ex-girlfriend's friends or relatives to kick in assistance?
posted by footnote at 12:01 PM on August 8, 2005

No Kwanstar, my suggestion actually makes sense economically as well. When attempting to pay off all debt vs. one or two specific debts, pay off a couple of the smaller debts first and use this money as leverage to pay the rest. This way your attempts to pay down high interest rate debts aren't diluted by lack of cashflow.
posted by curlyelk at 12:08 PM on August 8, 2005

This is a question, not a suggestion: When you co-sign for a car, is collateral there primarily the car or your credit rating/reliability? If it's just the car, can't he tell the debt collectors fine, take the car and be done with that portion of it? I realize the car isn't worth nearly as much as the loan amount ... but if the car is repo'ed is there still a consequence in the form of credit ratings?

I don't know if this counts as credit counseling, but I had credit card problems during college, and eventually dropped by one of those debt reduction places. They cut my credit card interest from 24 percent to 8 percent (the highest one) with the other three cut to 3 and 6 percent. The debt reduction place took a cut of $5 per card per month, definitely a bargain once all was said and done.
posted by Happydaz at 12:24 PM on August 8, 2005

I started to write a few things but it occured to me it should all be prefaced with one thing: he needs to total up all these debt obligations and determine if they're within his monthly ability to pay. There's no point in any triage if it's a lost cause and certain things are better or worse to do depending - the car, for example, may be partially protected or something he can surrender with no financial hit if he enters bankruptcy, so there's no point in taking a loss now in selling it if he's going to end up there anyway. If all these payments are above 75% of his income he might need to look into dealing with this through chapter 7 before it's no longer an option to him - the revolving debt it likely almost completely dischargable and if he declares before her he may get a better deal in many ways.

on to the triage:

"She's agreed to give him the car, but he can only sell the car for less than half of the outstanding loan debt" I hope (?) this means because that's what it's worth, not because of some horseshit arrangement with her. If it is, he needs to break that deal this second.

First and foremost, the thing he needs to do here is make a decision to look out for himself exclusively in this and feel okay with it. She's not paying her way and has left him holding the bag, apparently with more to lose given the home ownership. Don't lose a second of sleep in selling her down the river.

Getting the car is a good first step, since he's responsible for that loan for the life of it - she could come up with the money from now till the last payment and they piss off, leaving him with the black mark. Get the car, sell it or surrender it depending on what's a better deal. It's unlikely surrendering it is a winner unless he's already in the weeds - hard to sell a repo'd car.

The sooner he sells it the sooner he can deal with the debts he's stuck with. I'd suggest ditching that car he's making his own payments on too. Go get an under $2,000 vehicle off craigslist and stop making payments. Car loans are for suckers - rather than making payments to yourself for 5 years in advance of a cash purcase, you pay over a thousand dollars in interest as a fine for impatience. And you're doing it on a depreciating asset with non-deductable interest rather than on an appreciating asset like a home.

Credit counciling can be worthwhile but can also be an abomination - there's a lot of variety in services. For him it's likely only really worthwhile if he has a lot of credit card debt which he's payin above 10% on - most companies will agree to close the accounts and set the interest at 10% or under. If that makes little difference in his payments it may not be worth it - often you have to make payments in cashier's check or money order to the counciling agency, can't get any new credit (though that's probably a good thing for him now - avoiding the temptation to make things worse to make them short-term better) and some people have even had incompetent CCCS agents make things worse by screwing up payment schedules and creating fees.

On that subject, he needs to beware the universal default clause in all current credit card agreements: if they look at his credit report and see he's been late in payments to OTHER creditors they have the right (and they WILL) to raise his interest rate to default levels, possibly as high as 29.99%. At which point he will never get to pay them off.

He himself should go over to Art of Credit, create an account and post some particulars of his situation. Many people there have learned the hard way what to do and not do in a situation like his and will have general and specific practical advice on how to best protect himself.
posted by phearlez at 12:29 PM on August 8, 2005

Additionally - is she on the morgage as well? If she's on the title he needs a quit-claim from her, ASAP. You don't pay, you don't get to own things. As others said, joint accounts should be closed and any credit cards she's an authorized user on he should write AND call the CC company to make sure she's removed.

I feel I should clarify what I said above: I'm not suggesting he should screw her over, but he may find himself in situations where he can do better for himself by being the first to make a deal with joint creditors and he should avail himself of those opportunities. Trying to Take The High Road when making decisions that can hang around his neck for decades is a mistake. Clearly if she felt as strongly about that she'd be pouring coffee at Starbucks and writing him checks for her share.
posted by phearlez at 12:38 PM on August 8, 2005

I have known a couple of poeple who did a voluntary reposession when they were unable to make payments on a car. In any case, talk to the bank, especially if they're local, and try to work something out.
posted by theora55 at 1:47 PM on August 8, 2005

Is her name on the mortgage/deed? If so, he needs to retitle the house and refinance it to get her name off of it. This actually means more debt on his shoulders (refi fees) but if the house has appreciated in value, he can take some money out in the process to pay off any higher-interest debt he might have.

Get a roommate. Perhaps not a desirable course, but it sounds like this guy needs the extra income (this will have complicated tax consequences).

The suggestion to add everything up and see if it is within his means to pay is a good one, but he might be able to cover his obligations if he rolls his other debts into a low-interest mortgage, but might not be able to cover, say, credit-card debt as credit-card debt.

If he can't cover it, time to sell the house. I struggled for years to keep my house after I got divorced. I wound up selling it this year. I made out OK, but I probably would have been better off had I done so a lot sooner.
posted by adamrice at 1:48 PM on August 8, 2005

"Agreed to give him the car?"

How nice of her. He should also get her to "agree" to pay back the difference between what is owed and what he can get for it. She may never pay off, but that is quite the sucker-deal he signed up for. It is an up-front cash loss in return for being "the nice guy" and for the privilege of possibly saving his credit rating. Not worth it at all.

I took far too much debt in my divorce, in exchange for not having to pay alimony. We both got something out of the deal. On the other hand, this seems to be a one-sided mugging.

Also, I second what phearlez said. Your friend needs to total up all his payments and see if it is even possible for him to make them. If not then, much as he wants it, the house has to go.
posted by Invoke at 1:49 PM on August 8, 2005

adamrice - the original poster said he just bought the house a year ago. Interest rates have gone up since then, not down, and valuations have likely not improved all that much.

In voluntary reposessions typically the car will be auctioned and you will be on the hook for the difference between the selling price and the remaining loan. It's discussed over on Art of Credit on occassion. I am pretty sure I remember someone saying that in NY you've got the right to proof of the final sale price but it seems likely you'll do just as well if you still have the time and means to sell it yourself. If you're already several months in the weeds it might not be doable.
posted by phearlez at 1:56 PM on August 8, 2005

Surplus payments should go to highest interest rate. - this is true for the highest intereste rate once tax deductions are taken into account. Since mortgage interest is tax deductable, I'd say leave this one for last as far as paying off the principal goes.

Same is true with home equity loans, which he should definitely look into to pay off the credit card debt and the car debt. Since it's deductable, basically multiply the interest rate by .7 depending on your bud's tax bracket (.7 assumes 30%) and that's how much he's actually paying in interest.
posted by lorrer at 2:26 PM on August 8, 2005

Why go through voluntary repo rather than just selling the car for the best you can do and then making up whatever is left with the bank/dealer? I can't imagine that cars that go through repo fetch more on the market than cars that are sold in the normal course.

The guy should immediately sell whichever car will fetch more money versus the debt.

Home equity loan is also a great idea -- just make sure that the eventual repayment of the h.e. loan is not impossible, factoring in a rise in interest rates.
posted by Mid at 2:48 PM on August 8, 2005

No Kwanstar, my suggestion actually makes sense economically as well. When attempting to pay off all debt vs. one or two specific debts, pay off a couple of the smaller debts first and use this money as leverage to pay the rest. This way your attempts to pay down high interest rate debts aren't diluted by lack of cashflow.

Preposterous. Draw up a spreadsheet that proves your point, and if I can't find an error in your methodology or mathematics, I'll send you $50.
posted by Kwantsar at 5:19 PM on August 8, 2005

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