Sally Herigstad is a certified public accountant and the author of "Help! I Can't Pay My Bills: Surviving a Financial Crisis" (St. Martin's Press, 2006). She writes "To Her Credit," a weekly reader Q&A column about issues involving women, credit and debt, for CreditCards.com, and also writes regularly for MSN Money, Interest.com and Bankrate.com, and has guested on Martha Stewart Radio and other programs. See her website SallyHerigstad.com for more personal finance tips and free budgeting worksheets. Ask Sally a question, or read her previous answers in the To Her Credit archive
Dear To Her Credit,
I live in Georgia. My husband and I have some serious credit
card debt from using credit cards to fix our house up to sell. We now have
$50,000 in credit card debt.
We will be getting money when our house closes out this
month, but that is the only money we have for our retirement. We are on Social
Security and have no other savings. The house is selling for $20,000 less than
we paid for it eight years ago.
My husband was diagnosed with Lewey Body Dementia about a
year ago and his medicine costs are astronomical. We won't be able to make it
on our Social Security alone, and I don't know what to do or who to turn to.
Please can you give me some advice? -- Rosemary
It's difficult for people living on Social Security to get
out of debt -- especially when they have health challenges or are caring for a
spouse who does. Their options are much more limited than those of a person
still in their earning years.
Perhaps this can be a cautionary tale for anyone thinking
about spending $50,000 to fix up a house to sell -- especially if they have to
use credit cards to do it. Aside from basic cleanup, essential repairs and
select strategic improvements, remodeling a house to sell it doesn't pay --
especially in a down market. In fact, according to "Remodeling" magazine's
2009-2010 cost versus
value numbers, remodeling is often a losing proposition unless you can save
most of the cost by doing the work yourself.
For you and your husband, the money has been spent, just as
surely as if it had come from your savings account. You fixed up the house
intending to use the proceeds from the sale to pay off the costs, and you
probably got at least a somewhat better price from the home than you would have
without improvements. The question now is how best to pay off the debt.
I'm more concerned, however, that you secure an income
stream for you and your husband. When you get the check from the sale of your
house, you should set up an annuity or other income-producing investment for
you and your husband. Even if it produces a small monthly income, it's
essential for your survival that you get something from it. You might be
surprised how long your money can last if it gets a decent return.
If the check from the sale of the house is sizeable; for
example, if you owned it free and clear, I also recommend you pay off the credit card debt. The higher the credit card interest rate, the more important
it is that you pay it off quickly. Otherwise, the interest on the credit card
debt will far outpace the interest you receive on your investments.
A financial planner can help you determine how much of your
sale proceeds you should invest and the best way to do it. If paying off the
debt all at once would leave you with next to nothing, you have little choice
but to make payments instead. A planner or other counselor can also help you
set up a budget based on projected income from the investment and Social
I don't believe bankruptcy would solve this problem. If you
receive money from your home and then file for bankruptcy to try to get rid of
the debt, the courts will just use your cash to pay your creditors. Of course,
you would keep some money based on state exemption rules, but at first glance
the Georgia exemption rules don't look especially generous. You're better off keeping
control of your money, avoiding the expenses of bankruptcy and paying your
creditors what you can.
I hope a financial planner can help you find a way to
stretch your proceeds from the sale of your house so you can take good care of
yourself and your husband. Take care.
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