Business

<< Previous   of   Next >> Bill O'Leary / The Washington Post  (click to enlarge) Tarek and Evibeth Bathiche hold their infant daughter, Sophia Jade, while Anthony Bathiche, 2, plays. Giuliana Nakashima / The Washington Post  (click to enlarge) George and Kim Colon Bill O'Leary / The Washington Post  (click to enlarge) Amber and Trent Holmes stand in front of their second house, which they are renting.   ADVERTISEMENT   CONTACT THE HERALD Mike Benbow, Business Editor benbow@heraldnet.com   Published: Sunday, September 28, 2008 Becoming debt-free isn't easy By Michelle Singletary While the government tries to figure out how to bail out Wall Street, I've been working this year on ways to bail out three military families from debt that was crushing their spirits. These families -- unlike many major institutions -- didn't wait for a handout. Instead, they cut their expenses, ended their addiction to credit and took responsibility for their poor money-management decisions. The couples agreed to participate in this year's Color of Money Military Challenge and to expose their financial situations in exchange for help with their money woes. They are in many respects prime examples of the individuals at the core of the current financial crisis. They represent many Americans who haven't saved much -- if anything at all. They overused credit, racking up thousands of dollars in charges they had to roll over month to month. One family got caught in the housing downturn and as a result got stuck with a mortgage they couldn't afford. They all let their spending get out of control. But had these couples not begun to rein in their spending and aggressively pay off their consumer debt at the beginning of the year, they would be having a particularly tough time now dealing with the rise in food and gas prices. Tarek and Evibeth Bathiche, both Army personnel stationed at Fort Meade, Md., started the challenge with $27,600 on six credit cards. They have just $6,500 left to pay off. "When we wanted something, we wanted it and if we could make payments later all the better," Tarek said. "We are the typical American family because we are looking to buy a house but we can't because of debt. And once we are out of debt it will still be hard to buy a home with the way everything is going now." Amber and Trent Holmes certainly are an example of what many home sellers are feeling right now. For more than a year, they have been stuck with a second home that they've been unable to rent out for enough money to cover the mortgage and taxes. They also have been unable to sell it at a price high enough to pay off the mortgage. They are not alone. Existing home sales dropped by 2.2 percent in August compared with the preceding month, according to the National Association of Realtors. The price that people could get for their homes in many areas also continued to decline. The median sales price of new houses sold in August was $221,900, down from $263,900 a year ago. Amber Holmes said when they decided to upgrade to a larger home in the District of Columbia, they planned to keep their first home as an investment property. They figured the way housing prices were rising they wouldn't have any trouble selling or renting the house. They were wrong. When they finally got the house rented after 10 months, they still had to kick in $1,000 a month to cover the costs. "In hindsight, of course we feel we should have stayed in the other house," Amber said. "We purchased a larger home because we felt we needed the space with two teenaged boys. Now, we no longer have two teenaged boys with us. We would have been better off paying off our debt and putting money away." The couple actually can afford the home they bought. They just can't carry two mortgages and handle all their consumer debt. All of that debt lumped together put them in a precarious situation in which their monthly expenses were more than their take-home pay. "I can certainly say that with the amount of debt that we had, we should not have purchased when we did," Amber admits. "We did not take advantage of the subprime mortgage market. Our problem was with the market taking the dive that it did, there became a flood of rental opportunities thus making it very difficult to rent and command a rent that covered the mortgage amount." The couple, on my advice, finally decided to just take a loss and try to sell the rental home. Fortunately for them their current tenants want to buy it and have put a contract on the home. Unfortunately with housing prices deeply depressed, the offer is $125,000 less than what they owe. So they have to do a short sale. In a short sale the lender will accept less than the full mortgage amount, often forgiving what debt is left unpaid. Amber said they are waiting to hear if their lender will approve the deal. She said her lender told them it could take up to 60 days before they got an answer. "I guess they're not really eager to help when it's not your primary property," Amber said. "When you have people who are about to lose the roof over their heads and you're seeking help on a second house, they don't want to assist you until you're in dire straights." Even if the lender does accept the short sale, there are taxes to factor in. Because the home is no longer their primary residence, they may have to pay taxes on any debt that is forgiven. Usually, debt that is forgiven, or canceled, by a lender must be included as income on your tax return and is subject to tax. Last year Congress passed the Mortgage Forgiveness Debt Relief Act that allows borrowers to exclude from income certain canceled home-loan debt on their principal residence. However, only canceled debt used to buy, build or improve your principal residence or refinance debt incurred for those purposes qualifies for this exclusion. But even with the tax bill, the Holmeses are better off selling and getting out from under the mortgage on the investment property. They can't afford to keep supplementing the rent. "We will be relieved when the house sells, but then we are worried about the tax implications," Amber said. "But we will face that bridge when we get to it." If the couple continues to pay down their consumer debt and save, they should be able to handle the tax hit. Then there are Kim and George Colon, who together earn a six-figure income. Kim, 43, is a senior master sergeant in the Air Force. She's been in the military for almost 20 years. George is 53 and served 22 years in the Army. The couple represents the many Americans who have enough income to live on. They just got hooked on using credit and before they knew it they were more than $30,000 in debt on eight credit card accounts and had little in savings. "Watching the news about the economy just makes me feel I was part of the problem," George said. They aren't anymore. Eight months into this challenge the two have stopped their overspending and are $1,000 away from being free of all that credit card debt. It's a good thing, too. George, who is a government contractor, is worried that all the billions in borrowing by the federal government to bail out corporations may result in less government spending. He's worried any government cutbacks because of its rising debt load might affect his job. There's much we can learn from how these three couples have bailed themselves out of financial trouble. First, they recognized they had a problem. They sought help. They listened to the advice they were given. They changed their spendthrift ways. They are living a mostly credit-free lifestyle and paying cash. By doing all that, they've now positioned themselves to better handle the current economic crisis. Washington Post Writers Group READER COMMENTS Be the first to comment. You must be a registered user and verify your e-mail address to post comments to blogs or articles on HeraldNet. To register, click here. To read other terms and conditions, click here. Log out

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