What to do if everything you own is worth less than the debt balance owed (2013, percentage)

[04blackmaxx]

Eventually her house will get foreclosed on, its not going to go on forever. Then she can live in reality in a house a quarter of that cost, if she is lucky after going through bankruptcy.

Originally Posted by TwoByFour

Is this story real? It is hard to believe someone with her education can be so clueless.

Eh, not really.

I've known more than a few people who went to medical or law school, piled up tons of debt by living like they were already making six figures, then graduated and continued to spend like mad, buying houses and cars they couldn't actually afford.

Going to med school - which generally has comically light math requirements - doesn't mean she has any financial or mathematical sense.

She and many others with MDs and JDs have completely screwed themselves by thinking a couple letters after their name means they're going to live like kings. The person in the OP just seems to have taken in to an even more insane level than most.

[suzy_q2010]

Originally Posted by EricS39

Someone I know is a single female MD physician without a husband who couldn't find a Mr. Right

1) she bought and mortgaged a very expensive 5 bedroom 2-story house with a massive basement (so basically 3 floors) in case she meets someone

Her mortgage owed is far more than the equity value in the house...house is worth about $700,000 and she owes $950,000 in mortgage

she had a child through a sperm donor and since she works 14 hours per day in a hospital and frequent night shifts, she has a nanny attend to the child (costs $4,000/month)

She also has a German Shepherd dog and 2 cats


She has $570,000 in medical school debt

When you add it all up, she cannot balance the budget on her $170,000/year MD salary

What are her options at this point to get out of this debt hole? She is miserable every day, has no savings of any kind...sometimes having less than $5 cash on hand

But because of her salary being high, she cannot qualify for any assistance programs

Certain vendors will work with her between paychecks but there's never any money and I mean "all credit cards maxed out and ineligible for new credit...

I don't see any mention of retirement savings. Does "no savings of any kind" mean no 401K or IRA? Although in general I believe retirement money should not be touched except as a last resort, perhaps this situation might justify it. It could possibly enable her to sell the house and make up the amount she is underwater without having to wait for foreclosure or attempt a short sale. She is young enough to be able to rebuild the retirement even though she would lose the benefit of growth on what she pulls out.

Alternatives for child care have already been mentioned. The one I like best is finding a married couple to provide child care in exchange for reduced rent until she can sell the house. The best place to put out feelers would be the hospital where she works.

Since she has no discretionary money, she should absolutely learn the difference between needs and wants. That means eat at home, get free books and videos from the library, and shop resale stores for clothes and toys for the child. If her car is not paid for, she should sell it and get something cheap and reliable.

[texdav]

Originally Posted by ContrarianEcon

taking in renters is a start.

I have a friend in about the same boat he and his wife work but they can't make the payments on their debts.

they wont rent out their unused rooms

Oh well.

most areas have zoning as to where rental properties are allowed.Many people and even most in past owed more on mortgage than they paid for house or it was worth. She needs to get busy paying it off like they did.Cost of next buyer will likely be same at one point.Its like say I rent and my lifetime cost will be 1200 a month or more every month for the rest of my life.

[MDrenter223]

Originally Posted by stan4

Ok. I hope to god you are neither a math teacher nor a financial planner.

Off the charts, indeed.

What debt to income ratio do you think is appropriate?

If all her expenses are the same as a man who takes home 50k, and has a house that is 3x his income instead of 5x like hers is, she will still have substantially more disposable income.

Why do we have debt to income ratios? To make sure a borrower can afford to pay for living expenses and their debt. Food, gas, insurance, phones, Internet, cable, these are big chunks of income for someone making 50k a year, but are fixed costs and matter less as your income goes up.

So yeah a guy brining home 50k a year shouldn't get a house more than 3x his income, as his fixed bills are pretty high. But for someone making 170k that 3x rule of thumb just doesn't apply.

Yes this specific woman had no business getting the home loan given her student loan debt, I dont disagree there. But I do disagree with the notion that someone who makes 170k cannot afford a million dollar home.

A person taking home 50k a year makes 4,167 a month. A 150k mortgage is 716 a month. Leaving him with 3451 to live on/invest/blow on booze.

A person taking home 170k a year makes 14,167 a month (or 10 grand more, each month). A million dollar mortgage would run them 4774 a month, leaving them with 9393 to live on/invest/blow on booze.

Hope that math was simple enough for you. The million dollar home for someone making 170k still leaves them with a whole lot more spending money than someone living in 150k home who only makes 50k a year.

It's not your fault, numbers can be hard to understand.

[MDrenter223]

And remember FHA allows a mortgage to income ratio of 43%. Without getting into tax and insurance breakdowns, a person making 170k can actually afford a 6k monthly payment (if they had no other debts) according to FHA. And their ratios are only really applicable to the lower income buyers (not that 50k is low income, but compared to 170k it is), as shown earlier.

[Wendell Phillips]

No. There is no way that the doctor making $170,000.00 can afford a $950,000.00 mortgage (even interest only) and meet her other living expenses. No matter how you crunch the numbers, it adds up to default calculable to a mathematical certainty.

[justanokie]

Originally Posted by CaptainNJ

I don't see a problem with walking away from a house and mortgage. people should do that if they cant afford their home anymore. isn't that the deal?

This won't work for someone making this much money. They will auction the property off below market value and go after her for the difference....and they will get it.

Originally Posted by MDrenter223

I was referring to people saying a million dollar home wasn't affordable to someone making 170,000. A million dollar home is well within the affordability of someone making 170,000, just not someone who also has that debt and that nanny.

uhhh....no its not.

Originally Posted by MDrenter223

Yeah, and I proved all that in my comparison of homes and salaries.

I demonstrated the math. A person making 170k can easily swing a million dollar mortgage and stay below the debt to income ratio that is so coveted by conforming loans. And truth be told they can afford a whole lot more as their disposable income is off the charts.

a million dollar mortgage would imply a payment north of 6500 a month for taxes, mortgage, pmi and insurance. To keep your debt to income ratio within reason you would need to make over 250k a year.

Originally Posted by dazzleman

Conforming loans require the mortgage payment, plus property taxes and insurance, to be less than about 31% of gross monthly income. You're not counting property taxes.

A million dollar home on $170,000 is not realistically doable unless you put down a big chunk of cash to buy it.

Exactly, which she clearly didn't do since she owes 950k on it.

Originally Posted by MDrenter223

What debt to income ratio do you think is appropriate?

If all her expenses are the same as a man who takes home 50k, and has a house that is 3x his income instead of 5x like hers is, she will still have substantially more disposable income.

Why do we have debt to income ratios? To make sure a borrower can afford to pay for living expenses and their debt. Food, gas, insurance, phones, Internet, cable, these are big chunks of income for someone making 50k a year, but are fixed costs and matter less as your income goes up.

So yeah a guy brining home 50k a year shouldn't get a house more than 3x his income, as his fixed bills are pretty high. But for someone making 170k that 3x rule of thumb just doesn't apply.

Yes this specific woman had no business getting the home loan given her student loan debt, I dont disagree there. But I do disagree with the notion that someone who makes 170k cannot afford a million dollar home.

A person taking home 50k a year makes 4,167 a month. A 150k mortgage is 716 a month. Leaving him with 3451 to live on/invest/blow on booze.

A person taking home 170k a year makes 14,167 a month (or 10 grand more, each month). A million dollar mortgage would run them 4774 a month, leaving them with 9393 to live on/invest/blow on booze.

Hope that math was simple enough for you. The million dollar home for someone making 170k still leaves them with a whole lot more spending money than someone living in 150k home who only makes 50k a year.

It's not your fault, numbers can be hard to understand.

Reasonable is <30% for housing and <40% for total debt payments including housing. I think actual conforming loans use 28% and 36%.

You have it backwards. As your income increases your debt to income ratio should go down, not up.

A 50k annual gross income can reasonably service about 15K of annual housing payments. TOTAL debt payments should not exceed 20K. So that gives the person about 5k a year on credit, car and etc payments.

170k annual gross income can service about 51K a year for housing. Her housing costs are above that. Her total debt payments should not be over 68K a year, and I think her total housing costs are damn close to that number...alone. Its hard to see exactly what she is paying monthly without more details but it looks like on total debt payments she is around 130k a year, probably more given the vague mention of credit card debt. Thats ridiculous.

[John7777]

Actually, now that I think about it, $170k a year isn't really a lot of money, is it? This woman is nuts.

Originally Posted by John7777

Actually, now that I think about it, $170k a year isn't really a lot of money, is it? This woman is nuts.

It's a lot, but it's sure as hell not enough to buy a million dollar house while simultaneously paying back half a million in student loan debt and paying thousands and thousands of dollars every month to have someone else raise your kid. She's living like she makes several times her actual salary.

Realistically she could swing about 4k/month for housing expenses (assuming she gets the child care situation under control). If she didn't have the enormous other debt, then sure, she could use more of her income for housing and go a bit higher, in which case the million dollar house would be uncomfortable, but doable. But she's not anywhere close to that position. She has an entire other million dollar mortgage worth of childcare and student loan payments to make every month.