Making the Tough Financial Decision — Our Dream Home Goes On the Market

By Charles
In March 6, 2015
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How A Seasoned Debt Coach Took His Own Advice and Paid Off $63,000 Credit Card Debt

by Charles J. Phelan

This is the story of how a financial coach with a deep reservoir of hands-on experience still managed to get himself into $63,000 of credit card debt, and then solved the problem by making the same kind of tough decision he would recommend to a client.

In this first of a 3-part series, I’ll explain how I got into a financial bind despite years of experience. In the second installment, I’ll discuss how I went about solving the problem. And in the third and final article in the series, I’ll let you know how it all worked out, talk about making tough financial decisions, and hopefully get you thinking positively about your own situation.

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Part I, Heading Over A Financial Waterfall

We had just moved into our dream home, a 2,500 square foot single story beauty of a ranch home, with privacy and an incredible panoramic view. It was our little slice of paradise, purchased in late 2010, the best house I had ever had the privilege of living in. No other property we’d ever rented or owned came close to its upscale quality and unique charm. I figured this was it, our forever place.

“Coffin, or urn,” I told my wife. “You can pick either one, but the only way I’m moving out of this house is feet first.”

“Famous last words,” she replied.

“No, seriously. I’m never going to move again, period, end of story.”

“Never say never,” came her savvy response.

She was right. I was wrong. As I write this four years later (January 2015) I no longer own that house. In order to solve a deepening financial crisis that developed after we bought the home, I made one of the toughest decisions of my life and put our dream home on the market less than four years after buying it.

How did I get into financial trouble? The short version is I bought an expensive home just as my business income was about to drop off a cliff. Why did I take the plunge and buy a house in 2010 when the real estate crisis was still going strong? For starters, we were beyond tired with the rental home we had been living in since 2001. We had been working hard all our lives, and figured in our 50s it was time to acquire a nice home for the long term.

I had owned other properties and sold them well before the meltdown that started in 2007, and then went for years without being a homeowner. When the worst of the market crash seemed to be behind us, and our income had been healthy and stable for more than three years, I took a closer look and saw it was a buyer’s market. I felt the time had come.

I’m a self-employed debt consultant, with a unique niche in coaching consumers and small business owners how to settle their debts without paying big fees to get the job done. Business was very good during the peak years of the Great Recession, and it seemed like there was no end in sight to the tidal wave of distressed consumers seeking assistance with their debt problems.

While business was good, I put my nose to the grindstone, worked 12-14 hour days without vacations, and helped thousands of people. I stayed completely free of debt myself, remained frugal and built savings. Based on my financial situation in early-2010, I was approved for a home purchase up to $850,000, with 20% down payment.

I had the cash for a down payment, but didn’t want to overextend on the monthly mortgage and taxes. So I pulled back and focused on properties under $700,000. Let me be clear that I didn’t lust for a mansion or anything extravagant. In the San Diego coastal area, condominiums can sell for upwards of $800-900k. But to be conservative, we forewent the pool and golf course or beach location, and shifted away from the more expensive coastal area to inland regions where values were better.

We found an amazing home in Escondido, and after some negotiating ended up with a fair price of $654k, around $200k below the level I’d been approved for. Since the mortgage payment wasn’t much higher than the rent I had already been paying, I felt I was being prudent in this decision, and went ahead with the transaction. By the end of October 2010 we had closed escrow and were over the moon with happiness as we settled into our new home.

Our total household credit card debt at the end of 2010 stood at zero, and we had also paid off both vehicles long before. Our only debt was the house, $523,000 to Wells Fargo on a 30 year fixed conventional mortgage at 4.375%, payment at $2,612.26 per month (principal and interest).

Now, here’s where I have to get a bit more personal. If I just leave you with the raw financial data, it won’t present the whole picture. It won’t include the emotions that influenced my decisions along the way. To get the financial gist across, I omitted some truly important factors. I left out that we were buying this home during a time when my wife was seriously ill with surgery pending.

To make matters worse, since applying for financing earlier in 2010, my revenue numbers had been steadily dropping month after month. This added enormous pressure to move quickly before losing qualification. There were also numerous other personal and family crises contributing to our stress levels.

The pressure got so intense, my body reacted violently. I was unable to keep any food down for three straight days after I wrote the deposit check to open escrow. A week or so later, a blood vessel popped in my left ear, and the hearing in that ear turned to mush. I nearly incurred permanent hearing loss, but for a quick diagnosis and treatment by a good doctor.

These were psychological and medical warning signs I was in over my head. But I come from a tough New England clan, so I did what we do. I sucked it up and bulled my way through these challenges and “got it done.” We bought the house, moved in, and that was it for me. Never moving again, you see. Coffin or urn!

The truth was, I had a good sense of financial security before buying the house and promptly lost it the day I wrote that first check.

Nothing lasts forever, especially business income in the age of the Internet. It would take a separate series to explain all the ups and downs of the debt settlement field I’ve worked in since 1997. It’s a volatile industry, but during the peak years of the financial crisis there was a long period of increasing demand for services. After several consecutive years of posting great numbers, it was easy to get lulled into a false sense of security. Even us “pros” can make this mistake.

It’s hard to see a bubble when you’re inside it. This was true of the real estate bubble, and it’s also true for individual industries when they hit a boom period. Conditions were good for a long time in the debt relief world, long enough that I overlooked the old adage that past performance is no guarantee of future results. I made the false assumption those conditions would continue for the foreseeable future, and I was quickly proven wrong.

The entire debt relief industry hit the skids in late 2010, right when I was buying my dream home, although I certainly didn’t see it clearly enough to know what was happening at the time. There were a series of factors and changes that turned into a perfect storm, resulting in dropping income numbers month after month, and a shift from profit to steady losses.

It can be truly astonishing how swiftly business conditions can change. One moment you’re riding high and can do no wrong, and in the blink of an eye some new technology or company or website has left you in the dust. Just ask Blackberry. Once the reigning king of mobile devices, now a limping distant entrant in the tech wars.

One moment I had a prime link to my website from a highly ranked article page on a major financial news site, in place for years and generating tons of highly qualified traffic. Then, in a flash the article was gone, scrubbed from the financial site and replaced with a newer article that didn’t feature my link. Result? A 30-40% drop in traffic overnight. Trouble.

I won’t get started talking about the Google updates, how they fiddle with the search software to mess with the people trying to game the ranking results — many businesses operating in good faith get creamed in the process and that’s just what happens in shark-infested waters.

One of the assumptions I had made in my analysis was regarding property taxes, not a trivial expense at $7,500 per year. “They’ll pay their own way via tax deduction,” I told myself. Based on prior year taxes, I could use the deduction, and the tax savings would just about offset the taxes. On paper, it looked like a wash, and I congratulated myself on good tax planning.

Out in the real world, business income did not pace that of prior years, not even close, and I wound up losing money instead of turning a profit. As a consequence, I didn’t generate the income needed for the tax savings to pay off as intended. Instead, I had to come up with a way to pay those taxes when funds were tight. Enter the credit card and its tempting features!

Going into the crisis period, I had zero debt and well over $120,000 of open available credit across numerous accounts. I had kept credit lines open for just such an emergency, and carefully added more over time. After seeing negative cash flow month after month with no end in sight, I decided to conserve liquid cash by taking advantage of 0% promotional interest offers.

“Things will pick up yet,” I kept telling myself, always the optimist. But the numbers continued dropping in 2012 while multiple personal tragedies occupied our attention. It seemed like I never had the time to truly enjoy the dream home I had worked so hard to acquire. Nor did I have the income needed to properly maintain the place, let alone invest in the kitchen or bathroom upgrades we had planned. We weren’t even able to furnish the place the way we wanted to.

As time passed, our dream home gradually shifted from feeling like our pride and joy to feeling like a burden. Look into the price of a new roof or a new HVAC system and you’ll get the picture. If something breaks in a rental, you call the landlord. If you’re the landlord, the bill is on you, and some of those bills can be heart-sinking whoppers. You can go without such expenses for a long time, or you might get hit with a disaster tomorrow. The point is that even the best estimates for upkeep on any given property are based on the past, and the future won’t necessarily resemble the past.

By the end of 2011 our total unsecured debt stood at $18,600, virtually all of it added that year. A year later, the total credit card debt had climbed to $38,550. During 2013, I drew down cash to keep from adding further to the debt, but we had still reached $43,000 at year-end 2013.

So that’s $43,000 of debt added in just three years, with more on the way …

Please don’t try this at home! When it comes to credit cards, I know what I’m doing, so I was able to juggle multiple accounts to keep interest expenses as low as possible. I was using the cards as a shock absorber, to conserve cash for emergencies, keep the business going, and pay large one-off expenses like property taxes.

There are times in life when taking on debt is unavoidable. When it happens there should be no fear involved. But there are also times when it’s necessary to recognize financial reality and make the tough call.

Picture yourself in a canoe on the white waters of a fast river, being buffeted around violently and careening toward a waterfall that’s just around the bend. What do you do? That is the question I asked myself as 2013 turned the corner on 2014 and I could no longer deny I was in deep trouble.

… continue to Part 2

12 Comments

  1. i have no website. i read your post here. and i want to be a friend. i know the feeling you are going through.
    but dont despair. we have our mansion in heaven. also i suggest god can work out miracles in your life. start with how you eat. change your lifestyle. write me back if we can somehow be a support for one another

    again there is my email address. and my name is rachel. i live in san bernardino.

    • Rachel, thank you for your kind remarks. If you will read the second and third part of the series, you’ll see I am doing just fine now. 🙂

  2. I found this article very helpful. It seems like something we should all consider instead of going under.
    I want to pass this info on, as I know many people who could benefit from it. Thanks for sharing.

    • Pamela, thank you. I’m hoping my story will help a few others with their own “tough decisions.”

  3. I just read an article about you off MSN – just wanted to say it is much appreciated – you made the right decision sharing your story. I know it will benefit many people. Debt is a life-sucking fiasco – we really need to remember that “interest never sleeps” and we need to live more simply, not just to buy stuff. I learned a lot going through a training on debt reduction with some of my clients when I was working. It was time well spent, even though I am not in debt over my head, my kids have both been there already. I didn’t raise them to use credit like they did – too freely – I feel the way easy credit was thrown to them was a big hook. Who gives an 18-year-old kid without a job a credit card? I didn’t have a Visa card until I was 31! I was fortunate to be brought up in an era without technology lures and with frugal parents who did not overspend. I learned. .Watching the huge economic bubble burst took down a lot of people. Bankruptcy filings are out of control – and to me, all that stuff people just write off is nothing more than stealing – but I understand needing to get out from under a whole lot of bad decisions – I just feel it is wrong and used more than just a last resort. Thanks for letting me get on my soap box!!

    • Jean, I hear what you are saying, but honestly, my experience in talking with so many people is that most people don’t file bankruptcy because they want their “stuff” for free. It’s because they ran into problems with income, medical, issues, divorce, and so on. Anyway, thanks for sharing your thoughts and glad you enjoyed the article.

  4. Everyone don’t have a 600,000 dollar house to sell.

    • Eddie, yes, you are quite correct, not everyone has a home they can sell in order to pay off their credit card debts. May I suggest that you read the second and third part of the series? The series was about making tough choices, which may or may not include property-related decisions.

  5. I am at my wits end. The IRS forced the sell of my home, and took the entire balance of equity, however, I still have a balance with them. I have now been declared un-collectable. At age 61 I filed for and was immediately declared as disabled. I have not been able to work since then. I have bills which I have tried to pay something on, however it has gotten to the point that I cannot pay them any longer. The bills from years ago continue to amass interest rates. I only have one credit card with has a top credit balance of $300. I owe over $47K. I do not know what to do I drive my deceased Mother’s 1996 car and only pay for the insurance. I don’t have anything to sell. Trust me I have tried. I am pretty much at my wits end and do not know which way to turn, Do you have any suggestions? Thanks

    • Eric, you don’t say anything about whether you have considered bankruptcy. If you are on fixed income and don’t have significant assets then Chapter 7 may be available to you. That would take care of the $47,000 of unpaid debts/bills you are concerned with. If you have not done so, then I recommend you at least have a consultation with two bankruptcy attorneys. Let them review your case and advise on whether these problems can be resolved via bankruptcy. There is no shame in this if it’s the best solution per the numbers. That is a key point I was trying to make in my article series — let the numbers lead to the solution. In some cases, the only thing that makes sense is a fresh start via BK.

  6. Great honest, responsible advice. After almost financial ruin from a divorce and credit card debt, I sold my interest in a home in Arizona, paid off all of my credit cards and moved to Panama where I live like a King (not kidding) on social security with money left over each month. Bite the bullet and live within your means. Right??

    • Roger, thanks for your comment, and good to hear you were able to extricate yourself from a similar situation. I have indeed considered relocating overseas myself, and I have not ruled out that possibility long-term. It’s one of the reasons I’m holding off for now on buying another property. Also, I should give credit where it’s due. The “three year rule” is something I learned from one Paul Terhorst, a CPA who retired to Argentina in the 1980s at the age of 35 and has lived very well abroad since on about $50 per day.

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