The Two-Income Trap - Elizabeth Warren [87]
A family facing a financial crisis should think like a family at war. You must concentrate on preserving what matters most, and you must let the other things go. When trouble comes, ask the central question: Which of your assets do you most want to hold on to? Maybe it’s your car, your home, or your health insurance policy. Decide which things you value most, and pay those bills first. It doesn’t matter who else is making demands on your resources or what they are threatening you with. Once you are in trouble, you will need to fight—and you should be fighting for the things you care about, not trying to satisfy the loudest or most aggressive creditor.
Most important, do not, under any circumstances, put those assets at risk. You will be bombarded by offers to “lower your monthly payments” by taking out a second mortgage or cashing out the equity from your home. Don’t do it. Refinancing their homes to pay down other bills is the single biggest mistake made by families in trouble. The mortgage companies (and even some financial advisors) may tell you it is savvy to replace your high-interest credit card debt with low-interest mortgage debt. But if you are in financial trouble, you will probably be steered into a high-cost, subprime mortgage, making any gains illusory. Worst of all, you will be jeopardizing the roof over your family’s head. Take a moment to consider. Do you honestly believe those “low monthly payments” are a free gift? Not a chance. If the mortgage lender gives you a lower rate than the credit card company, it is because the mortgage lender gets something in return—the right to push you into the street, seize your home, and sell it.
If your troubles get bad enough, you can file for bankruptcy to eliminate your high-interest credit card debts and cash advances, but bankruptcy cannot help with a home equity loan or a refinanced mortgage. You must pay the mortgage lender in full (plus all penalties, late fees, and interest) or face foreclosure. The chance to save a few dollars a month on your credit card bills is not worth running the risk that you won’t have a place to live.
Plan strategically. If the bills keep piling up, take a realistic look at your overall situation. Can you pay off your debts in the next two years? If the answer is no, talk to an attorney, read a good book about your legal options, and look into filing for bankruptcy.5 But be aware that bankruptcy is essentially a one-time option that will be unavailable again for six years. Once you file for bankruptcy, you must fly without any parachute.6
If at all possible, wait until the crisis has passed before declaring bankruptcy. If you are out of work, wait until you have found a new job. If you have a child who is seriously ill, wait until he is better and the health insurance has paid what it owes. It can be extremely tough to hold on that long, especially if collection notices are stacking up and creditors are calling you every night. But if you wait, you minimize the risk that you will once again find yourself buried in debt after you file for bankruptcy. The bankruptcy system gives a rare opportunity for a second chance. If you wait to file until the worst of your problems are over, you give yourself the best odds of getting exactly what you need from the bankruptcy judge—a fresh start.
Guilt-free default. What about all those bills you will never repay? Whatever you do, don’t reassume any old debts that were discharged by the courts. One in four families signs on to pay off debts they no longer owe after filing for bankruptcy.7 Why? Because they don’t understand their rights. As the story about Sears showed (chapter 6), creditors routinely bully bankrupt families by threatening to repossess the family’s possessions. Except for the house or the car, this is nearly always an empty threat.