Our expert offers a plan for a family with two young children, a $4,800 monthly mortgage payment, $14,000 in credit card debt and suddenly has been hit with a job loss.
Erica Sandberg is a prominent personal finance authority and author of “Expecting Money: The Essential Financial Plan for New and Growing Families.” She writes “Opening Credits,” a weekly reader Q&A column about issues for people who are new to credit, for CreditCards.com.
Dear Opening Credits,
My husband recently lost his job. We live in a great small town in Connecticut and have kids in first and second grade. We have a few maxed-out credit cards with a payoff totaling $14,000. Our mortgage is $4,800 a month. Should we downsize in our town and keep looking for work, or should we move to where more jobs are? Can we even get a mortgage with no job in the family? We have about $50,000 in savings. Should we pay off the cards with some of it? We could stay in our home and look for a job, but that will eat up the savings we do have, and our credit is not great. Please help us! — Liza
Sadly, your story is not unique. Much of what I’m hearing these days is a variation on a similar theme: “We were doing fine, and then — boom! – our life of security and abundance came crashing down.” So here’s some help, in the form of a plan.
First, you and your husband need to determine if your setback is temporary or permanent, as your options for resolution will differ based on the answer. In either case, there is good news — unlike many others, you’ve got cash, and $50,000 is a substantial amount. Assuming this money is not in your retirement account, I think it is smart to pay the credit card debt off completely with it. Because your credit has already suffered, chances are your interest rates are high and fees are being assessed. A $14,000 balance is always costly to keep, but when times are lean, it’s even less affordable. You’d still have $36,000 as security, too.
Analyze all your employment prospects thoroughly. It’s common for families in trouble to not see all reasonable options, simply because it’s not what they had been doing before. If you’re home with the children, decide if you’re willing and able to change gears and earn an income. Your husband also needs to be flexible and seek work that will see you through this tight spot. I have no way of knowing what the job prospects are in your area, but what I do know is that moving, in and of itself, is neither economical nor stress-free. Job hunt from where you are rather than moving to “where the jobs are.”
If you believe your circumstances are temporary and you can be earning as normal in the next year, then make every attempt to stay put. Here’s what to do:
- Figure out exactly how much you need coming in to survive — mortgage, food, necessary transportation, etc.
- Whatever that number is, aim for a total income that allows you to pay at least that much. You can always add to it later.
- Request a hardship plan, often called a forbearance plan from your credit card companies. Such plans suspend payments or interest rates or both for a few months. With a $14,000 credit card balance, your minimum monthly payments are probably somewhere in the $350 range. Holding off on that sum for a while will offer welcome relief.
- Contact your mortgage lender and let them know what is going on. You can try for a hardship with them, too. Unfortunately, many lenders are only giving breaks to those who’ve fallen behind. Though I wouldn’t recommend not paying, be aware that you may have a hurdle to jump there.
On the other hand, if you determine your situation to be long-term, then yes, selling and moving to a more affordable home and neighborhood makes sense. Finding a buyer in this market and purchasing a less expensive property may be tough, though, especially with damaged credit and no income. Therefore, even in this scenario, securing salary that will cover basic expenses is primary. Another possibility is selling your home but renting in your neighborhood. This way, you wouldn’t displace the children and could keep them in the same school district.
While you’re navigating through this crisis, avoid the trap of relying on plastic. Also know that maintaining a positive credit rating will help you and your family keep future options open. Employers are routinely checking credit reports to gauge responsibility. Therefore, make your payments on all liabilities on time, and if you do arrange a hardship plan with any of your creditors, stay on top of it. Alert them to any changes, and if you can, resume normal payments early. When — not if — you are back on your feet, those financial institutions will prove to be valuable allies.
See related: Forbearance plans offer temporary debt relief, 8 myths about settling credit card debt, 8 things you must know about credit card debt, Better credit can improve your job prospects, Laid off and in debt: 5 steps to take now
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