How do I get out of a home I can't afford? Help Me WalletPop!
Q. We bought a house in Tennessee, and we are deep into debt. We want to know if we can just ask the bank to take back the house? And would we owe the bank money? We have two car payments we are having trouble paying, we are up to date on all our bills, but have nothing left to live on.
We bought the house this past November and received the tax credit. How does that work? Does that have to be repaid too? We are planning to meet with someone from consumer credit counseling, but we are so stressed from our bills. We are both retired, and we already filed bankruptcy in 2005.
Lenoir City, Tenn.
A. First of all, I want to say that you're doing the right thing by going to a consumer credit counseling agency. Just make sure that the agency you work with is a member of the National Foundation for Credit Counseling or the Association of Independent Consumer Credit Counseling Agencies. They should also have a HUD-approved housing counselor on staff.
When you say "ask the bank to take back the house," what you're referring to is a deed in lieu of foreclosure, which is essentially when you hand over the deed and walk away. It is one of a couple of options that are available to consumers who are trying to avoid foreclosure – the other is a short sale, which means you sell the home for less than you owe on your mortgage.
"Either option protects the homeowner from recourse on the part of the bank for any bank losses on the transaction. In other words, they should not owe the bank any more money," says Richard Korn, a certified financial and housing counselor at Apprisen Financial Advocates, a Consumer Credit Counseling Service (CCCS).
Whether or not you can do a deed in lieu or short sale is a question for your bank, and in particular, your bank's loss mitigation department. So you need to pick up the phone and call them. Tell them that you're currently up to date on your bills, but you think you're going to start falling behind soon, and you want to do something about it. If they agree to a short sale or deed in lieu, make sure that a non-recourse clause is part of that agreement. That means you don't owe them any money, now or in the future.
As far as whether you'll need to pay back that tax credit – Korn says that while there are circumstances where the tax credit is required to be repaid, it's unlikely. If you're concerned, you should contact your local Legal Aid office – they often have tax professionals on hand who can look at your specific situation.
In the meantime, I want you to think about ways you can cut back, because whether you stay in this home or not, you have a budgeting problem on your hands. You say you have two cars – do you need both, or could you sell one? Are there other expenses you can eliminate? This is something you can talk about with your credit counselor.
"It may be that once the housing issue is resolved, the other debt and budget issues, including the troubling car payments, can be addressed. Obviously, even if they resolve the issue with their current home, they'll have new housing costs to incorporate into their budget. Going forward, this couple's goal should be to create a spending plan that identifies their priorities and creates stability for a comfortable retirement," says Korn.
I couldn't agree more.
Consumer Ally problem solver Jean Chatzky is the "Today Show" financial adviser, a longtime financial journalist and best-selling author.