Ask Stacy: When is it OK to Walk Away?

This reader is unemployed, has a home that’s seriously underwater, and has $35,000 worth of credit card debt that she can’t pay. What would you advise?

Here’s a question I recently received…

Just let me say I love reading your newsletter, there is so much to learn!

Long story short, I am a 58-year-old female unemployed since 2/2009 and am married to a 56-year-old accountant earning $42,000 who claims he can’t earn more that that. We are living in a condo that I own. (Just to let you know if there is a wrong choice to be made, I’ve made it!) At one time, this dumpy condo had a $192,000 worth, which I greedily refinanced twice, and now has an interest-only mortgage of a $107,000. The condo is probably worth $32,000, although Zillow puts it at $62,000.

My father, a real estate agent, and several other people recommend walking away from this condo, as it will never be worth the $107,000 loan on it. It’s one of the loans that made the economy what it is: The mortgage will go up to a higher amount next year.

My husband is paying the $710.49 mortgage payment and the $195 HOA fee with yearly assessments from $500 to $1,200. We were current as of last month but have decide to let three months go and then apply for a loan modification, and if that doesn’t occur, just walking away!

My intuition says that we shouldn’t do it, but like I said, I never seem to make the right decisions. What do you have to say about it?

It gets better: We have about $35,000 in credit card debt, and the balances never seem to go down even when I work, and they are all not being paid down or at all. I have been feverishly trying to find any job, but Phoenix does not seem to be hiring. What would you advise?

-Ready to Walk

Here’s my advice, Ready to Walk…

You need to see a credit/housing counselor immediately. Read 5 Tips to Find the Right Debt Relief Agency. I suspect that you might even be a candidate for bankruptcy: See Dealing With Debt: Bankruptcy.

As for whether or not you should walk away: Last October I wrote a post called Website Says It’s OK to Walk Away – No It Isn’t. The post was about a website that sent out a press release implying that virtually any homeowner – including those with the ability to pay their mortgage – was justified in walking away from an underwater mortgage unless the lender agreed to reduce the balance or otherwise work with them.

My take? The first two sentences of the post sums it up: “Some people seem to think they can morally justify walking away from a mortgage they could afford to pay, simply because their house went down in value. Time to man up.”

I take issue with people whining that the bank owes them a better deal simply because their house went down in value: If you can afford to meet your obligations, you meet them – period.

What I don’t take issue with, however, is people relieving themselves of an obligation they can no longer pay. If you can’t make it, you can’t make it, whether your mortgage is underwater or not.

Now that we’ve gotten that out of the way, however, I’m troubled by some of the other things Ready to Walk says in her email. See if you agree.

First, she says her husband “claims” he can’t make more than $42,000 as an accountant. Doesn’t that wording suggest that she doesn’t believe him? She also says she owns the condo and he makes the payments. Maybe it’s just me, but I think it sounds like she doesn’t like him very much.

She says that despite the fact that she’s feverishly looking for work, she’s been unemployed for two years and “Phoenix isn’t hiring.” I’m not going to say it’s easy to get a job in Phoenix or anywhere else, and I have total empathy for the long-term unemployed. At the same time, however, one has to question if her search for “any kind of work” is really “feverish.”

Most troubling, she says she “greedily” refinanced their mortgage twice, which suggests she tapped her equity to support a lifestyle she couldn’t afford, especially when you add in the $35,000 of credit card debt that – along with the mortgage – is no longer getting paid. She also says that even when she was working, they couldn’t pay down their debt: more evidence that these folks have made a habit of living beyond their means.

Bottom line? If Ready to Walk wants to try to force a better deal out of her lender by refusing to pay the mortgage, fine. My guess, however, is that the lender is unlikely to reduce the mortgage balance to a level that she’ll feel comfortable with. I also doubt the lender will grant a new, smaller mortgage to someone who’s not paying their other bills.

By going to a credit counselor and/or bankruptcy attorney, Ready to Walk might yet salvage her situation. But however this turns out, my guess is that unless she makes some big changes in her approach to money, this won’t be the last time she finds herself in financial trouble.

Stacy Johnson

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  • I totally don’t get what they are complaining about? They are paying $905 a month for somewhere to live, and would have to pay about that much no matter where they went or if they “walked away”. So, the husband makes $42K or lets say $30K after taxes and such. That’s still $2500 a month take home pay. Their house payment is 36% of their take home pay. So, they have 64% left over, or about $1600 a MONTH for food, utilities, vehicles and maintenance, home repairs, even plenty for entertainment, haircuts or GASP, to put some of that toward that huge credit card bill. I pick up on the husband and wife don’t get along vibe, like she expects him to make more and contribute more when she is contributing nothing? I bet he CLAIMS she can make minimum wage, at least. Maybe staying together is easier than really looking for a job. She never mentions what she does for work, that she cant find a job, but McDonald’s is always hiring for that early shift no one wants. Have you considered a career in drive through service? I heard nothing about kids, any extraneous expenses like medical bills, college loans for adult children. So, what are these people complaining about?

    Ma’am, What difference does it make what the condo is worth on Zillow. Are the walls any thinner or the roof showing sky since it dropped in value? You didnt buy it as an investment property. You are LIVING IN IT. It has the built in value of being 4 walls and a roof, plumbing, electricity, you know, shelter, the basics, you are going to need them either way. Forget the MORAL aspect, where are you going to LIVE if you walk away? So your condo isn’t going up in value or holding it’s value. So what if the monthly payment is going to jump soon to maybe, shockingly, 50-60% of your take home pay for your one working household member. You bought it based on TWO household incomes, I assume. Welcome to everyone else’s world, who is staying in their homes longer, seeing their value decline, and not considering walking way. These two must be living WAY beyond their means and I think that she’s “ready to walk” on the marriage, more so than the condo. Buck it up, find a job, leave your “husband” if you want to, but there is no point in selling it, walking a way from the loan, or trying to find somewhere cheaper. Stacy’s advise is dead on, to get some legal and debt consultation help. But with TWO jobs and some sacrifice, you can easily get out of this hole….that is, if you really want to. I think you will keep asking the question of different experts until someone gives you the answer you want to hear.

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