3 Credit Cards Cleared but Still 1 Mortgage Too Many
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The Holmes Family
Age: Trenton is 38, and Amber is 37.
Background: The Holmeses live in the District with Amber's teenage son. Trenton is an Air Force aircraft mechanic and tech sergeant and has served 18 years in the military. He will receive $10,000 during the year for reservist duty. He reports to Andrews Air Force Base. Amber is a paralegal specialist with the federal government and a part-time makeup artist. Together, the couple make about $135,000 a year.
Goal: Pay down debt and cut expenses.
Progress: The Holmeses have paid off three credit cards totaling $1,232. They have $10,000 remaining on five credit accounts.
A lingering problem for the couple is the mortgage on a second home. They have rented the home, but the rent payment still leaves a $1,000 deficit, which they have to cover.
They have a home-equity loan of about $28,000 and Amber has about $55,000 in student-loan debt.
New developments: When the challenge kicked off, I suggested that the Holmeses pull out roughly $7,000 of their contributions to their Roth IRAs to pay down debt.
If you pull out your original contributions (not your investment returns), you do not have to pay a penalty for early withdrawal or taxes because the cash you put in is after-tax money. Typically, it's not a good idea to raid your retirement account to pay down debt, but the Holmeses were over budget and needed the money to quickly reduce their negative cash flow.
However, after deciding to pull out the money, they found they needed it for other expenses. They had some necessary home improvements. And because of their heavy debt load, they hadn't saved enough to pay property taxes.
Their challenge: The biggest obstacle to their debt-reduction plan is their second home.
Next step: They need to talk to their tenants to see whether they are interested in buying the home. I've also told them to put the house on the market, priced to sell. If they can't sell at their asking price, they need to consider a short sale, which means selling the house for less then what they owe. Given the current housing conditions, the bank will probably forgive the portion of the loan that the sale proceeds don't cover.
Overall, the Holmeses are back on track after a few financial stumbles. If they stick to their budget, continue to cut expenses and get rid of the second house, they should be able to wipe out most of their consumer debt by the end of the year.
