Paying off debt on a fixed income isn't easy

To Her Credit columnist Sally Herigstad
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, and also wrote for MSN Money, and, and has guested on Martha Stewart Radio and other programs.

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Question for the expert

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

Answer for the expert

Dear 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 Security benefits.

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.

See related: Can debt collectors garnish Social Security?, On Social Security, with debt collectors calling, Balancing rising expenses against a fixed income, Creating a plan to pay off $60,000 in credit card debt, Steps to take to pay off credit card debt

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Updated: 11-23-2017