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Dr. Fiona Chen
Dr. Fiona Chen, Certified Public Accountant (CPA)
Category: Finance
Satisfied Customers: 355
Experience:  Former IRS Revenue Agent
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My questions concerns debt management vs home equity loans.

Customer Question

My questions concerns debt management vs home equity loans. Which is best for a person to do, when you live paycheck to paycheck. My concern is, if I choose Credit Management company, they will cancel my credit cards. I have used those to supplement my monthly living expenses over the years. I have 7 credit cards. A debt totaling $47,000. (One of those debts is a home equity loan of $25,000. the rest credit cards.) I own my condo, paid in full. I make $24,000 a year.
Submitted: 15 days ago.
Category: Finance
Expert:  Dr. Fiona Chen replied 15 days ago.

Dear Customer,

What you need is budgeting to increase income and/or to reduce expenses.

If we constantly and continuously live beyond our mean, the debt problem will not be resolved even if we file for bankruptcy.

In this situation, we should not borrow against the house any more because you will eventually loose the house. Even if your negative flow per month is like 600, in one year, it is 7,200 negative. Sometimes just the property tax can drag one's spending situation down.

In the budget, consider to even cut food expenses, to cut every spending as in emergency as soon as possible.

Depending on your age, the plan can be different. For some reason, there has been some crisis in your life to have changed your financial situation. First, you were able to purchase the house, now, you can hardly keep the house.

Some dramatic action would include to sell the condo and reduce your living expenses. Then, hold on to the money and try to increase your job income. Ownership and upkeep a property is high cost. Consider to rent. You need to be able to live within the 24,000 minus income and payroll taxes. That is, you need to be able to live within your final take home pay and not just the gross income.

The best debt management in your situation is no more debt. As far as we can see from now, you cannot pay back the debt. That is the problem. Even if you have no tax, no living expenses, you work for two years straight, you still cannot pay back 47,000.

The next steps need some serious planning. You may want to rent out part of your condo to reduce your expenses. Of course, there are so many unexpected consequences with a live in roommate, which may make the alternative unappealing.

Depending on your line of work and roots in the area, [Connecticut is a very expensive state to live], consider relocate to other parts of the country and other states with lower property tax, no state income tax, relatively low living standard, and relative good in employment. Fortunately, you have some equity in your house to possibly make such move.

Please feel free to follow up.

Regards,

Fiona

Fiona Chen, MPA, Ph.D., CPA, ABV, CFF, CITP

Customer: replied 15 days ago.
Thank you for your thorough response. I see the wisdom in a lot of what you wrote. I suppose I should fill you in on a little more. You were correct in saying a crisis occurred. I gained the funds to buy my condo out-right through the death of my mother and the sale of our family home. As far as my age goes, I am 60 years of age. I live alone. All of my family has passed away. I have chosen a single cousin to be my heir. I have diabetes, high blood pressure, both controlled with medication. I am a retired postal worker. I retired with a medical disability. My federal annuity becomes effective when I am 62. I presently work at a tennis club answering the phone. I also am a weekend church organist for 3 churches. I'm not sure if the new info changes your response. Feel free to respond if you wish.
Expert:  Dr. Fiona Chen replied 15 days ago.

Dear Customer,

Yes, it changes much. First, you have and will have sufficient resources to move to other states. Second, you are young and old enough to do retirement planning. Will this cousin move with you?

Your answer somehow does not respond to why your income cannot cover your expenses.

The reason why you don't want to borrow against your house is that if you cannot repay the line of equity loan, you can loose the whole house no matter how little you owe and how much equity you have on the house.

When you start to receive retirement income, it cannot be that you are seriously thinking to use that retirement amount to pay off the 47,000 debt. If you accumulate more than in between now and 62, it would become even harder to pay. The debt can still be there even when you turn 70.

If you retire with medical disability, you should have some type of retirement income.

Everything else remain the same as the last posting.

Regards,

Fiona

Customer: replied 14 days ago.
Thank you again for your response. To answer some of your questions. No, my cousin will not live with me. She lives in VA. The reason I took the first home equity loan, was to cover home improvements in the condo after I moved in. (I would hate to leave this place when I spent so much getting it the way I wanted it.) In addition, I used the HEL to paying off credit cards and pay taxes. I found it easier to charge it, rather than wait til I had saved. Right now, I have enough income to cover payments. I just don't have enough to get ahead. I understand your reasoning against another home equity loan. Also understand the wisdom to leave my retirement income alone. Medical disability: my early retirement forced me to use funds saved for retirement. When those funds were depleted, I am forced to wait until I am 62. I retired medically at 45. I have a lot to think about.
Expert:  Dr. Fiona Chen replied 14 days ago.

Dear Customer,

I am not sure what is "get ahead" and its goal. Hopefully, your planning will be detailed and complete to cover this aspect.

Another possibility is to refinance the condo and pay off the debt. That probably will get you the lowest percentage of finance. The other alternative is to investigate the possibility of "reverse mortgage" which seniors may qualify after age 62.

To have a fully paid condo may benefit your cousin but not necessarily you.

Regards,

Fiona

Fiona Chen, MPA, Ph.D., CPA, ABV, CFF, CITP

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