Bankruptcy: a Drastic Step but Sometimes the Wisest One

Then, take all the money you were putting toward paying off that balance (plus your savings) and start paying down Card No. 2. You should be able to pay off that card in less than six months. When that's finished, you'll need to take the extra cash you were spending (on cards 1 and 2) and divide the amount equally between cards 3 and 4.

The good news is that if you have been able to save $5,000, you have extra cash in your budget to make a huge, fast dent in these payments. As long as you have stopped charging on these (and any other) accounts, you should be able to pay off all your cards within 18 months.

That will dramatically improve your credit score.

An additional thing to keep in mind: If your credit score takes a big hit, some credit card companies have been known to change the terms on their cards and increase the interest rate on the outstanding balances. That change, which is known as "universal default," can hit you hard.

Finally, you should consider the low interest rate you have on each of the cards and calculate how long you have until the rates go up.

If you will still have a balance to pay on the card when the interest rate is scheduled to rise, you might want to pay down a greater amount on those cards.

My father passed away in January. He and my mother owned a principal residence, which my mother may want to sell at some point soon. Is my mother still entitled to the $500,000 home sale exemption on their principal residence?

Yes. A new law permits her to take his exemption if she sells in the next two years.

She will be able to shelter up to $500,000 in profit as long as she has lived in the house for two of the past five years.

My grandfather, a lifelong resident of Florida, quitclaimed his house to me before he died a few months ago. In 2006, he took out a second mortgage for $40,000, using the home as collateral. He did not have any insurance on the loan, so I was told by the issuing bank that I would have to continue to make the payments.

What are my responsibilities regarding the loan? I would like to maintain ownership of the home and use it as a rental property or as a second residence, as I will be moving out of state soon. Is this reasonable, or should I think about selling?

I don't own any other property. I have significant student loan debt but no credit card debt. I'm getting divorced and have a 4-year old child.

The home is now yours. Unless you want to lose it to the lender, you will need to continue to make the monthly mortgage payments. If you can get a good price for the home in this market, you might want to consider selling.

If your situation is such that you might move into the home someday and can afford the mortgage, taxes, insurance and upkeep, then keeping it might work out. Also, if the costs are low enough that it would be less expensive to carry the property than to rent another place in the area when you visit, then that's an important consideration.

If you can rent out the property and get enough cash to cover all of your expenses and more, you should consider keeping it as an investment home. Just make sure you find tenants who will maintain the home and take good care of it.

But be prepared for the time you will spend managing the property from out of state. If you won't be living within a few hours of it, selling becomes a better idea.

After all, who will take care of making sure that everything is going well at the property? Who will go by periodically to make sure that the tenants have not destroyed the home? Who will take care of maintenance issues when the tenants tell you that the roof is leaking or the house needs normal repairs?

Your pending divorce might complicate the issue. If this property is considered part of the marital estate, you may have to sell it to give your soon-to-be ex a share of the proceeds. Please consult with your divorce lawyer on what you plan to do so that it doesn't affect your divorce proceedings.

Finally, since you did not inherit the home but received it as a gift from your grandfather, you might have a tax problem.

When your grandfather quitclaimed the home to you, you took title to the home and accepted it as if you had purchased it for the price your grandfather paid. If he owned it a long time and bought it for a little and now it's worth a lot, you may have federal income taxes to pay on the profit from the sale.

If the home were to become your personal residence and you lived in it for two years and then sold it, you might avoid having to pay any federal income tax on the sale. As a single person, you are allowed to exclude from federal income taxes $250,000 of profit on the sale of your primary residence if you have lived in the home for two out of the prior five years.

But because you are moving, you won't be able to use the home as your primary residence now. If you might be able to do so in the future, then renting it for a while until you can move in makes sense.

Please consult with a real estate lawyer, in addition to your divorce lawyer, to sort through these issues and make a smart move.

Ilyce R. Glink is an author and nationally syndicated columnist. Her latest book is "100 Questions Every First-Time Home Buyer Should Ask." Samuel J. Tamkin is a real estate lawyer in Chicago. If you have questions for them, write Real Estate Matters Syndicate, P.O. Box 366, Glencoe, Ill. 60022, or contact them through Glink's Web sites, http://www.thinkglink.comand http://www.expertrealestatetips.net.

Copyright 2008 Ilyce R. Glink and Samuel J. Tamkin

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