After 20 years at the same company making more than $100,000 with a nice home and money in the bank, Jerry found himself broke and facing the possibility of losing his wife, his home, and everything he had worked so hard for his entire life. He was broken and didn’t know where to turn.
MISTAKE: After Losing His Job, He Assumed He Would Quickly Find Another
Jerry worked for the same local bank for over 20 years and felt secure in his job. But, one day in the spring of 2009, Jerry’s boss told him he was being laid off. “Jerry, we have really valued all your hard work and dedication over the years, but, the way we do business has changed so we are going to have to let you go.” Jerry was beside himself; he had no idea how he was going to tell his wife the news he himself could barely stomach. But, he considered himself well qualified and with 20 years of experience in IT, he was confident he would quickly find a new job with the same pay.
Jerry dedicated all of his time to hunting for another job. Pouring through the newspapers, calling old contacts, scouring the Internet, and sending out thousands of resumes. Nothing. But, he wasn’t discouraged. He kept on. The unemployment benefits Jerry was receiving weren’t enough to cover all of the family expenses and not wanting his family’s life style to change at all; he used credit cards and money from his savings to pay his bills. Eventually his credit cards were maxed out and his savings were depleted.
At this point, Jerry started to become concerned he wasn’t going to find employment like he had before. Now, still not wanting to change his family’s lifestyle, his only option was to take an early distribution from his 401K. First, he took out $25,000, which after taxes and penalties got him only $15,000 in cash. Jerry and his wife, Mary, blew through this money quickly, with mortgage payments and living expenses just as high as they were when he had a job. He continued taking out more early distributions from his 401K, until it was finally gone and at age 48, he realized he was never going to replace the retirement savings he worked for 20 years to build.
Pro Tip: It’s never a good idea to start using money from your savings and 401K. Early distributions from retirement savings come with huge costs will be protected if yo ever need to file bankruptcy. And, retirement savings can be difficult, if not impossible to replace altering your life retirement permanently.
Hitting Bottom: The Incentive To Take Action
All of his dreams of retirement turned to dust. Jerry was down in the dumps, he felt like he had failed Mary and his family, not to mention himself. To make matters worse, Jerry argued with Mary every day about money. She berated him for not being able to find a job and for spending all of their savings. Now, there was no money to pay the mortgage.
Pro Tip: It’s crucial not to let your financial troubles, no matter how heavy they may feel, get in the way of your relationships with loved ones. It’s important to work as a team and get through the bad times together. Communicate often and develop a strategy early.
Jerry soon realized that he wasn’t going to find another high paying IT job any time soon, but he had sons who depended on him; “I’m not letting my kids quit hockey.” Jerry was resolute in that statement, making his sons quit hockey because he couldn’t provide would’ve been the most heartbreaking thing to him, so he took a job selling used cars.
Pro Tip: Don’t keep trying something that you are not getting any success with. The work world has changed; it’s not always the smartest assumption to make that you will regain employment in the same industry or at the same rate of pay again. Evaluate your skills immediately after losing employment and consider: are there jobs out there in your area of work and have you been on interviews and not getting hired? The business world has changed drastically and many people over 45 don’t have the skills for the current marketplace.
Jerry was an introvert and no salesman but he tried really hard to meet his monthly sale goals. Not making enough to cover his monthly expenses and not having any savings to draw from, he stopped paying the mortgages and when he missed his third payment the loan went into default and the bank would no longer accept payments.
Jerry’s first thought was “What am I going to do? Am I going to be kicked out of my home tomorrow?” My family is going to be on the street.
Pro Tip: While it is best to act ASAP, don’t panic after your loan goes into default. Even after you’re served with foreclosure papers, the overall foreclosure process in NJ typically takes many months. But, it is best to act fast to get the best possible outcome given your situation.
He frantically searched Google to find some help and get some answers to his many questions. Jerry’s wife took a small part-time job which kept their car on the road and helped toward the food bill.
Things were bad.
The Call For Help
Knowledge is Power
Eventually, Jerry felt like he had reached the end of the rope, and he starting calling around for help. He thought a foreclosure lawyer might help and her sought the help Todd Murphy who had been recommended by a friend. Together, they did a complete analysis of his situation.
Pro Tip: Assess the situation. There are certain things that a lawyer who understands real estate and foreclosure law can look at in order to assess a particular situation. I examined the value of his home, the projected value of his home, the amount he owed on the home, monthly expenses and his income, to determine what strategy would be best for him.
Slouched deep in his chair, Jerry clearly didn’t want to be telling his sad story but it was a common one to Todd Murphy.
They reviewed his situation together. Jerry had two mortgages on his home with combined principal balances far exceeding the value of his home. The most glaring thing that stood out to Mr. Murphy was that just for Jerry to pay the minimums on his credit cards was going to cost him more than $1000 per month. That was interest only and nothing going toward the principal balance. Jerry had two cars, the family mini van, which they made payments on, and Jerry’s car he owned that was on its last legs. They ran a credit report and saw his credit scores were in the mid to high 500s which is just about as bad as they could be.
Pro Tip: Usually best course of action is to apply for a loan modification in which all of the missed mortgage payments are added to the principal balance and a new payment with a good interest rate is calculated. But, loan modification doesn’t work for everyone. Jerry’s income was too low and his debt and expenses were too high to qualify. If you’ve determined that you can’t qualify for a loan mod, begin looking into bankruptcy.
After determining that Jerry wouldn’t qualify for a loan modification, they looked at the possibility of a chapter 13 bankruptcy. This would act as a measure to catch-up on the missed payments over a period of 60 months and at the same time start making regular monthly mortgage payments at the existing rate of interest that in Jerry’s case was 6.1% (high by today’s standards).
Jerry had heard a lot of bad things about bankruptcy and the stigma it carried, but he could see he was in a pretty deep hole at this point so he listened.
Pro Tip: Don’t discount the idea of a bankruptcy right off the bat, educate yourself and find out how it may be a good solution to your problem.
They began the chapter 13 bankruptcy analysis by looking at the principal balance on Jerry’s first mortgage. It exceeded the value of the property.
Pro Tip: Sometimes, if you qualify for a chapter 13, you can strip off the second mortgage lien and convert the second mortgage to unsecured debt (like a credit card). Given Jerry’s income, very little of the funds he would pay each month into the chapter 13 bankruptcy repayment plan would go to pay his unsecured debts, so that would significantly reduce both the second mortgage loan and the credit card debt saving him hundreds every month and at the end of the 60 month repayment plan, the remaining amount on those debts would be discharged. This was a very big benefit and had the possibility of perhaps setting Jerry up to qualify for a loan modification due to the reduced debt load he would be carrying.
They continued the analysis by projecting out the value of this home in five years as well as what the principal balance would be at that time and we saw that the property was likely to still be underwater. That was an important consideration because Jerry would not be able to sell his home if he still owed more than it was worth – even in five years. Finally, they looked at Jerry’s monthly income and expenses and even though he wouldn’t have to make payments to the credit cards and the second mortgage loan, he still didn’t have enough cash each month to pay all of his living expenses, the first mortgage and the bankruptcy repayment plan. The chapter 13 bankruptcy wouldn’t work.
Pro Tip: You can find your home’s value on sites like Zillow. In Jerry’s chapter 13 bankruptcy analysis, one of the major factors that determined whether or not a bankruptcy made sense for him was the projected value of his home.
Jerry was disappointed to say the least.
Making The Best Of Your Situation
They then discussed another strategy. One that could put all of this debt behind him, allow him to save some money each month and rebuild his credit rating so that in the near future, Jerry could walk away from this home and buy a new home. Mr. Murphy explained that in New Jersey, it takes many months to foreclose on a property. He explained to Jerry that a chapter 7 bankruptcy would instantly wipe out his credit card debt saving him of $1000 per month in payments that were never going to pay down the balance. The chapter 7 would also discharge Jerry and his wife’s obligation to pay the mortgage loans without accelerating the foreclosure timeline at all. Debt-free, Jerry could start rebuilding his credit right away while living rent-free and even saving money every month. So, they arrived at a strategy that starts by discharging all of Jerry’s debts which cuts his monthly expenses and gets him started on rebuilding his credit immediately. Because it takes in excess of 12 months and usually in excess of 18 or even 24 months to fully foreclose on a property in New Jersey, Jerry would have the time he needed to get back on his feet.
Pro Tip: It takes about 12 months to rebuild credit to 680/690 and 24 months to rebuild to 750. 680/690 is sufficient to get a car loan or lease at a good rate and 750 is the minimum to be able to apply for a mortgage loan. This means Jerry, after 2 years, would be in the admirable position of having great credit and money in the bank and ready to consider buying a new home again.
Transformation in Thinking
By the end of the meeting, Jerry finally felt like a weight was lifted from his shoulders. He raced home to tell Mary. When he explained the chapter 7 recommendation Mr. Murphy had made, she said, “A bankruptcy Jerry?! We’ll never be able to buy another home again, let alone rent, we won’t be able to get jobs, and everyone will look at us differently.” Soon, they were back in the Mr. Murphy’s office together so he could explain the details to Mary and assure her after 12 to 24 months, they would be in very good financial condition. After some careful thought, she was ready to take action. Mary saw Jerry light up in a way he hadn’t in a long time; she finally saw a gleam of hope in his eyes.
The Light At The End Of The Tunnel
Now, about 18 months later, Jerry found himself a new job that he likes and is making decent income and he and his wife are putting money aside for the future while they both rebuild their credit ratings. Although they chose not to save this home and ultimately will have to move, he regained his self-respect, was able to engage with people and was more positive. Jerry and Mary’s marriage started to improve once they began working towards a common goal; they were finally able to communicate in a constructive and loving way.
Pro Tip Summary:
Be honest with yourself from day one.
Assess your situation and understand all of your options, so you can make better decisions.
Set realistic goals and develop a strategy.
Things only begin looking up once you begin working together.