Should We Run Away or Deal With Our Debt?

by Steve Rhode


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Question:

Dear Steve,
We can't decide what makes sense for us. My husband is 65, and I am 55. I was downsized out of a very decent job four years ago and couldn't find a comparable job, so we took a huge hit financially. Now, I work retail basically to pay for health insurance.

Hubby works for a very unstable privately-owned company that is seriously going under as demonstrated by missed pay checks, etc. They have never offered insurance. This is a touch and go situation with his job. Every week we hold our breath. Hubby has tried to find another job, but there's not much out there for a 65-year-old man.

We own a larger five-bedroom, three-bath home that is in rough shape, so it's too much work and expense to fix and sell. It has a cracked foundation, no basement, and a one car garage. It also needs a new roof. Plus, we have several tax liens against us due to two years of contract work (which created a snowball bad deal with taxes owed the IRS).

Anyway, we think when all is said and done, the house will yield nothing in terms of profit to us. Hubby thinks we should sell to a flipper or walk away. The sad thing is that our mortgage would be paid off in two years.

We have been trying so hard to just hang on until the house is paid off. We thought we'd then have money to pay the IRS, but they keep garnishing, adding interest, and putting liens in place.

We feel like we are totally screwed no matter what we do. It's really getting us down. House could have been somewhat of a nest egg. Oh well, we made bad choices getting in debt with IRS. Live and learn. We have a small, old farm house on acreage way out in the boonies. Hubby is fixing it up, so we can move there. My husband and his brother own this 40-acre place in the boonies. We do have credit card debt, and we need health insurance. We are scared of the IRS. We will basically have no jobs or money to pay credit cards if we end up out in the boonies. It's far from any opportunity to make money unless I plant a garden and grow veggies or something.

We are too close to the forest to see the trees, so what do we do here? Should we walk away from the house, file bankruptcy, and move to farm? What happens to the house if we walk away? Will the mortgage company sell it for very little because we owe very little and then there's nothing for the IRS and we still owe IRS a ton? I think by now we must owe the IRS $60,000? It was my hubby's great idea to wait to pay IRS. Now we owe more in interest and penalties than we ever owed in taxes. If we move to the boonies, we will have even less ability to pay the IRS.
Kelly

Answer:

Dear Kelly,
Thank you for writing to me. I always say that at the end of the day debt problems are really math problem wrapped in emotion. And clearly you have the opportunity for all sorts of emotion to manifest itself in this situation.

My first priority is for you to do what is best for you moving forward. It's almost impossible to repair the past using the future.

From the way you describe your house, it has a lot of expensive issues that you could pour money into. It doesn't appear you have access to the funds to pay for it anyway.

You mentioned just selling the home to a flipper and walking away, but you only have two years left on the mortgage. It's not clear how much you think the home would sell for above the two years of remaining payments. Regardless, that doesn't sound like much of a nest egg, but it may be something even though your opinion now is that it will be nothing.

I completely understand the emotional desire to flee to the country where life seems like it would be less stressful and simpler. The mental picture of life in the country in the small old farm house may be comforting, but it might not be better.

You paint the picture that moving out to the boonies would move you away from much, if any, of an income opportunity. My concern is that old farm houses are not like fine wine. They don't get better with age. Eventually you will be facing home repairs and maintenance issues but now with less income or no income to deal with them.

You will need to be proactive on maintenance of the farm house because you will be getting older and aging into a position you may not be able to deal with it.

In your current situation, the math has not worked for some time. The unaddressed home issues, the back IRS debt, and credit card debt paint a picture that your income was not sufficient to meet the demands of expenses for some time. The best answer for you has two options:

Logically Thinking: The best option would be to talk to a real estate agent and get an understanding of the current market value of your home in its current state. Also ask the agent for an estimate of a "fire sale" price so you know what you could get for the home quickly.

You should also talk to a local bankruptcy attorney who is licensed in your state and discuss your specific situation. IRS debt can be discharged in bankruptcy if it is of a certain age.

The bankruptcy may be a bit complicated by the ownership interest in the farm, but that's a question for the bankruptcy attorney.

Staying closer to employment is a smart move. Even if you have to rent a place closer to town, it will give you a better chance of earning an income. The reality of living far out in the country with little to no income and planning to spend your days in an old farm house is a disaster in the making.

Am I a good candidate for bankruptcy?

If you are both not working and earning credits into Social Security, your retirement income will be marginal and it doesn't sound like you have big retirement income to fall back on otherwise.

By talking to a real estate agent and a bankruptcy attorney, you can get facts and data from which you can make a fully informed and logical choice about what is better for you moving forward towards your days when you will need income but will be unable to work.

If you decide that bankruptcy is a logical way for you to get a fresh start, then do that and keep things more in check moving forward.

Emotionally Thinking: Running away and hoping the future is magically better while carrying around a bunch of debt will push and stress you because it will be unresolved.

Conclusion

I totally get it. The pressure is building and you'd like to find some quick relief in what feels like an impossible situation. However, rather than acting emotionally and potentially putting yourself in a worse situation, I think you have an opportunity to do some homework and set yourself up for a better future.

It sure sounds like the bankruptcy route would be worth strong consideration.
Steve Rhode
Get Out of Debt Guy - Twitter, G+, Facebook

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This article by Steve Rhode first appeared on Get Out of Debt Guy and was distributed by the Personal Finance Syndication Network.

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