Homeowners struggling with mortgage debt are looking for answers. This week, certified financial planner Pamela Christensen offers some advice. She's one of our three new "Ask the Experts" writers who offer free financial advice online at www.sacbee.com/ask.
She joins Sacramento attorney Gina Lera on wills/estates and investment adviser Cameron I. Beck on investing, and our other experts on federal income taxes, banking, job hunting and investment clubs.
If I am facing foreclosure, can the lender demand that I use my 401(k) and IRA to stay current on the loan?
The quick answer: No. The expanded answer: Assets held in 401(k) plans are protected from creditors by the Employee Retirement Income Security Act (ERISA). IRA assets are not protected by ERISA, but your contributions are given protection from creditors up to $1 million, through the 2005 federal bankruptcy legislation.
My wife and I moved from Reno to Sacramento to find work. We purchased a home here but still have our Reno house. We rent the Reno house, but the rent does not cover the mortgage. The house was purchased in 2005 for $320,000 and is now worth about $200,000. My wife and I are in our 60s and do not believe the Reno property will be worth the remaining debt until after we pass on. If I (reduce) the mortgage through a Chapter 11 bankruptcy filing, I believe the house would become marketable in a few years. Is this a good plan? We are current on our debts, even the Reno mortgage, so the bank will not consider a loan modification or short sale.
First of all, kudos for "doing what you needed to do" to find employment, rather than digging in your heels or walking away. It may not be worth the potential damage to your credit, not to mention the stress, to go through a bankruptcy filing. Banks and lenders are becoming more amenable to working out situations like yours. Even if current with payments, I would start with your lender to see what you could do with the rental on a short sale.
It is very important that you state your case effectively and have all the necessary documents in hand when you contact your lender. Go to www.thehomeloancoach.com and click on "loan mod" for tips.
Other helpful resources can be found at www.nwsac.org (NeighborWorks HomeOwnership Center, (916) 452-5356) and www.nidonline.org (the housing counseling agency of the National Association of Real Estate Brokers).
Have you considered an installment sale or lease-to-own (agreement) with the tenants? It might help lessen your tax consequences.
I purchased my first home in 2005 before the housing market went downhill ($300,000 for 1,300 square feet). My wife and I purchased another one in '08, when we both had stable jobs and income. Now we are struggling to make payments for both houses. What would happen, beside ruining our credit, if we walk away from our first house, which is now worth less than $160,000?
Working with your lender to come up with a solution is better than "walking away." If you choose to take a short sale, it is a blemish on your credit rather than a black mark from foreclosure, which would limit you financially for at least three years. Once you get above water, make sure you build a robust emergency fund – three to six months of living expenses – before venturing into illiquid assets like real estate.
– Claudia Buck
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