Living month to month because of huge debt: sell house to get back to 0?

adebt

Hi,

Due to some unfortunate circumstances over the years my parents (both aged 50) have accrued a substantial amount of debt. They currently earn a combined total of £3000 per month after tax and that is all spent on paying off debts, mortgage and living costs.

The house that they own is worth around £140,000 based on the sale price of neighboring houses. They re-mortgaged the house about 6 years ago and they currently have £70,000 left to pay on the mortgage. The other debts they have (a secured loan against the house, an unsecured loan, credit card(s)) come to around £50,000, making their total debt £120,000.

For the last 6 years they have not been using any credit cards or taking on any more debt, however the growing costs of living have made the day to day finances more of a squeeze and they are now spending 90 - 100% of their monthly income, meaning they are unable to save any money. This means that any unexpected cost would put them over the edge and means I have to help them financially sometimes. They have £0 cash.

The debt they have will take around 10 years to pay off based on the current amounts they are paying, however because they are using 100% of their income towards the debts and living costs they are unable to cope financially with unexpected costs, a broken down car for example would mean they had to borrow money from me, take on more credit card debt or miss payments on pre-existing debts. This situation is unworkable.

The options I think that they have are as follows:

1. Continue to live as they are now, hope that they do not, at any point, have any unexpected costs for the next 10 years. Rely on their children (2 dependent, 1 (me) independent) to help financially when they can. At the end of the 10 years they will have £0 debt and a house worth ~£140,000.

2. Sell their house and wipe out all their debt, use any extra money from the sale to put into savings, move into rented accommodation using their combined income to rent a nice house and putting every penny they can into savings allowing them to build up money to purchase a house in 10 years (before retirement).

To me option #2 seems the only viable option, I have spoken to my parents and they are on board with the plan, however I want to check first to see if I have missed any potential issues.

Currently they have £70,000 home equity, £70,000 owed on their mortgage and £50,000 in other debts.

If the house is sold they will have £0 home equity, £0 owed on the mortgage and £0 in other debts, they will also potentially have anywhere from £0 to £20,000 in cash (depending on how much the house sells for, we're currently assuming £0 as that's the worst case scenario).

Have we got the right idea about how to tackle this problem? I think the best way to sum up how I'm currently thinking is:

It is better for my parents to have nothing owed and nothing owned with a £3000 per month income than it is to have £120,000 owed, £70,000 owned and £3000 per month income being spent just on staying on top of everything.

They would need to restart their financial life at the age of 50, however it would mean that for the next 10 to 15 years (until they retire) they would not be ever worried about being able to pay bills for that month; they would no longer be living month to month. If they were to save £1,000 per month for the next 10 years that would give them enough money to buy a new house for them to retire in, because my mother also has a pension with the NHS that would give them around £80,000 in cash at retirement.

Thoughts? Have I missed anything? Does this seem the correct way to fix their unmanageable debt? If any more information is needed please let me know.

darren_clarke

some times it is best to go bankrupt and start again, there is a lot less stress, plus, how long will it take to sell the house, if one of them got ill could they survive, as you say they are spending 90%-100% of there wages on debt,

my advice would be to go bankrupt and start again, they might not even have to sell the house, put if they go bankrupt then the receivers will make sure they pay there mortgage and have money to live on,

Barbeduk

Have they sought advice from one of the debt charities? That's probably the best place to start.

Selling the house will only work if the circumstances that led to the debt have been resolved, otherwise they'll be looking at renting in retirement.

dizzyrascal

Sorry, I don't normally post on here but there were things in your post that worried me.

Firstly, they do have some equity in the house so for me I would always try and hold on as I think your plan for them to save up for another house is unworkable.
Secondly, it worries me that you are taking charge of their finances. They have to do this themselves or they will end up back in debt again. It can be a very hard lesson to learn but they must work it out for themselves.
Also, where I live, renting is very expensive. My mortgage is way cheaper than any house I could rent. I could rent my house out for twice the cost of my mortgage so I would be checking the market locally.
Also, every time you pay the mortgage you are buying a brick or two of your house. Renting in retirement sounds very scary, especially if they haven't learnt to budget.
Also, that sounds like a very large lump sum payment for the incomes you describe (£80,000, are you sure?) and I think you are unrealistic to believe that they can save £1,000 a month. They might just spend this. That is what most people tend to do.

I think the board would need to know what the mortgage payments are and how long still they have finished paying it off? Mortgages are still a relatively cheap way to borrow money and it is usually cheaper than renting.
Could they rent out and live somewhere cheaper?
Also, no one will be retiring until at least aged 66 (possibly older) and the rules on pensions change all the time so don't rely on a cash lump sum. Might not be possible in 10-15 years time.

lindsloo

Soa? I would be wary of selling my house to pay off debt and at their age avoid bankruptcy but that's my personal choice. Pp is right, rental is becoming extortionate, would they really be better off. Can you not get mum or dad on here and get themselves motivated and take responsibility.

Good luck

Seen_the_light

Go to CAB / seek advice from debt charity first. It's not clear whether interests rates on debts have been suspended and whether your parents have contacted any of the lenders to make arrangements? Might be a good idea to do this first before loosing the security of the house.

jayII

How much are the mortgage and other secured debts altogether? These need to be paid.

The unsecured debts can be tackled with an IVA or similar, a debt advice charity will advise about this.

[Deleted User]

This is the link on where to find FREE advice on debts:

https://forums.moneysavingexpert.com/discussion/4228011

Also, it might be worthwhile posting an SOA (Statement of Affairs) if you can sit down with them and get accurate information.

http://www.stoozing.com/msoc/soacalc.php

As others have mentioned above I would be VERY cautious about moving from home ownership especially if they have dependent children, and/or anywhere near retirement (age could well be a factor preventing them from getting another mortgage later down the line!) For this reason I will highlight again that they need to seek professional advice (from one of the charities listed in the link above).

HTH

D9

raq

read your post with interest.

we are in a £260k house with a mortgage of £130k. We have debt and currently are living mouth to mouth due to my hubbys work, but like another post had stated if we stayed in our area to rent it is £300 a month more to rent.

I personally would try and keep hold of the property.

gardenlady_2

Please don't let your parents sell their house! I know this must seem the only way out, but it really isn't.

They should phone National Debtline or Payplan or CCCS tomorrow. I would imagine that the way forward would be a Debt Management Plan, where many creditors freeze or reduce interest and they are paid an amount monthly that your parents can afford after their essential expenses have been paid. For example, we pay £300 a month between our creditors. The minimum payments on the credit cards would be somewhere in the region of £1000, so you can see the difference this makes! Obviously, this will take a while to pay off- about 6 years, but is way better than losing our home.

The disadvantage of a DMP is that their credit rating will be awful. They will be unable to get any more credit, but this is not a bad thing... It also impacts on a remortgage- they would be unable to change lender. My advice would be to remortgage at a good fixed rate before entering into the DMP.

As others have said, renting will be much more expensive and they will have lost their only asset by selling. When the DMP and the mortgage is paid off they will be in a brilliant position.

This can be sorted out without them losing their home! Good luck.

adebt

Thank you for the replies everyone, I will try to provide as much information as possible.

dizzyrascal wrote: »

Firstly, they do have some equity in the house so for me I would always try and hold on as I think your plan for them to save up for another house is unworkable.

As mentioned their problems with accruing debt are problems from the last 30 years, in the last 6 years they have not added any more debt they have only been paying off their debt.

The situation right now is their income is £3,000 per month, around £2,000 of that is spent on covering debts and the other £1,000 is spent on living costs. Every month living costs come to around £1,000 (I've looked into them, there's no real way for them to reduce the costs substantially, they already have made sacrifices like no holidays, no nights out etc).

dizzyrascal wrote: »

Secondly, it worries me that you are taking charge of their finances. They have to do this themselves or they will end up back in debt again. It can be a very hard lesson to learn but they must work it out for themselves.

They have already solved the problems that got them into debt, it's a very long story but basically my father had tax problems after he left university and he was always taught that he should never go bankrupt or it would destroy his life forever, so to avoid bankruptcy he borrowed as much money as possible and that caused them to enter debt, they've been recovering from that ever since.

My mother canceled all her credit cards 6 years ago and now the only payments made for stuff are in cash or from her debit card.

dizzyrascal wrote: »

Also, where I live, renting is very expensive. My mortgage is way cheaper than any house I could rent. I could rent my house out for twice the cost of my mortgage so I would be checking the market locally.

This is not the case in their town, they pay around £500 per month towards their mortgage and for that amount they could rent an equivalent house, for £700 per month in their town there are modern large houses (much bigger than the house they own).

I rent a modern 5 bedroom 5 bathroom house in the same town for £900 per month and that is the most expensive town, where they live is exceptionally cheap.

dizzyrascal wrote: »

Also, every time you pay the mortgage you are buying a brick or two of your house. Renting in retirement sounds very scary, especially if they haven't learnt to budget.

They have learned to budget, it is how they've been able to keep on top of the debt payments.

dizzyrascal wrote: »

Also, that sounds like a very large lump sum payment for the incomes you describe (£80,000, are you sure?)

My mother has worked for the NHS for 25 years, I've reviewed her pension documents and due to the department she works in she has a "special" pension, one that not many people have. Due to the work she does it has a higher income and pay out than "normal" pensions, I don't entirely understand it but I've read the documents and it's correct.

dizzyrascal wrote: »

and I think you are unrealistic to believe that they can save £1,000 a month. They might just spend this. That is what most people tend to do.

Their current expenditure per month on debt repayments is close to £2,000, part of that is the mortgage payment (£500 per month) if they were to have £0 debt tomorrow they would now have an extra £2000 per month to use; this £2000 would need to cover rent, but even if they were to rent the most expensive house in the town that would still leave them with over £1000 per month to save.

dizzyrascal wrote: »

I think the board would need to know what the mortgage payments are and how long still they have finished paying it off?

They have just over 10 years remaining to pay on the mortgage at £500 per month.

dizzyrascal wrote: »

Could they rent out and live somewhere cheaper?

The house is not in a great condition, the heating system needs to be replaced along with some smaller problems, I don't think they would be able to let it out legally (due to the problems) and the cost of fixing those problems will be in the ~£5000 range, which they cannot afford at the moment.

We have discussed that if they do go ahead with the plan to sell the house I will help cover the costs of fixing the major issues to make the house salable, under the understanding that they repay me once the house is sold.

dizzyrascal wrote: »

Also, no one will be retiring until at least aged 66 (possibly older) and the rules on pensions change all the time so don't rely on a cash lump sum. Might not be possible in 10-15 years time.

My mothers pension is with the NHS, it allows her to retire at 55, 60 or 65, the longer she remains with the NHS the higher her pension cash lump sum will be and the higher her monthly payments will be. This is due to the department that she works in.

lindsloo wrote: »

Soa?

I will put one together soon, I have copies of their outgoings and information on their debts that I have been looking through.

lindsloo wrote: »

Pp is right, rental is becoming extortionate, would they really be better off.

The town that they live in is relatively insignificant, the pricing of houses is stable and low, the cost of rental would not be much higher than the mortgage now.

lindsloo wrote: »

Can you not get mum or dad on here and get themselves motivated and take responsibility.

I might not have explained properly: my parents are both on board with a plan to solve their financial problems, they have long since stopped accruing more debt (no credit cards for the last 6 years, only spending cash).

They have been paying all their current debt obligations, the problem is that the monthly payments are not allowing them to make any sort of savings, at the end of every month they have £0 cash and that will continue to be the case until about 4 years from now when the smallest debt is paid off, that will give them about £150 extra per month.

My brother was attending dancing lessons for a few months (I helped pay for them) but they have had to cancel those now because they just can't afford them and they were only costing around £50 per month.

If my mothers car were to break down tomorrow, or in 6 months, they would not be able to get it fixed because they can't afford anything but their living costs. If a window is broken in the house, if my brother needs to go on a school trip, if the prices of getting the bus go up, any minor cost outside of their current living costs is something they cannot afford.

Seen_the_light wrote: »

Go to CAB / seek advice from debt charity first. It's not clear whether interests rates on debts have been suspended and whether your parents have contacted any of the lenders to make arrangements? Might be a good idea to do this first before loosing the security of the house.

They have previously had an IVA which was paid off, however because of this when my mother went to her bank to arrange for debt consolidation they rejected it.

I'll ask her to contact the debt charities to see what they suggest. From what I understand all of their debts have been frozen and they have settlement figures from all which they are paying towards.

jayII wrote: »

How much are the mortgage and other secured debts altogether? These need to be paid.

£95,000 is the total amount of secured debts, £25,000 is the unsecured debts.

Domino9 wrote: »

This is the link on where to find FREE advice on debts:

Thanks, I'll look into that.

Domino9 wrote: »

Also, it might be worthwhile posting an SOA (Statement of Affairs) if you can sit down with them and get accurate information.

After I've replied to everyone here I'll put an SOA together.

Domino9 wrote: »

As others have mentioned above I would be VERY cautious about moving from home ownership especially if they have dependent children

The secured debt payments are high enough that if they were to fall behind (which is possible) the house would be taken, the thinking is that it's better for them to sell the house on their own terms to cover every debt than it is to risk the next 10 years of the house possibly being taken to only cover the secured debts.

If they were to fall one month behind on their mortgage or secured loans due to a disaster (eg: a pipe burst in the house, which has happened before) they could lose their house, which would leave them without a home and with remaining debts.

raq wrote: »

we are in a £260k house with a mortgage of £130k. We have debt and currently are living mouth to mouth due to my hubbys work, but like another post had stated if we stayed in our area to rent it is £300 a month more to rent.

Good luck

gardenlady wrote: »

Please don't let your parents sell their house! I know this must seem the only way out, but it really isn't.

I think part of it may be that the house has always been unsuitable and had problems, so the desire to find somewhere better to live is playing in to the idea that this is a viable solution. They will definitely sell the house one day (regardless of the debt) so the question is now (to cover the debt) or spend the next 10 years living on the edge and then sell it before retirement to find a new place for retirement.

gardenlady wrote: »

They should phone National Debtline or Payplan or CCCS tomorrow. I would imagine that the way forward would be a Debt Management Plan, where many creditors freeze or reduce interest and they are paid an amount monthly that your parents can afford after their essential expenses have been paid.

From what I understand of their situation that is the situation they are already in, they've arranged for a settlement figure on all their debts which is what they're paying towards. I'll ask about if the interest is frozen.

gardenlady wrote: »

For example, we pay £300 a month between our creditors. The minimum payments on the credit cards would be somewhere in the region of £1000, so you can see the difference this makes! Obviously, this will take a while to pay off- about 6 years, but is way better than losing our home.

This sounds to be a much more workable situation, does retirement matter? For example if they're 50 and the new amounts meant it would take 20 years to pay off, would that be possible to arrange even though they'll have retired by then?

gardenlady wrote: »

The disadvantage of a DMP is that their credit rating will be awful. They will be unable to get any more credit, but this is not a bad thing... It also impacts on a remortgage- they would be unable to change lender. My advice would be to remortgage at a good fixed rate before entering into the DMP.

Their credit ratings are already quite poor from what I understand, I'll mention the DMP to them. Thanks!

gardenlady wrote: »

As others have said, renting will be much more expensive and they will have lost their only asset by selling. When the DMP and the mortgage is paid off they will be in a brilliant position.

The reason I think selling the house is a viable solution is because once they have no debts their income is high enough that they could save £1,000 per month (even if they were renting) this would mean in 10 years they would have £120,000 in the bank.

If they were to enter a debt management plan that lasted 15 years that enabled them to save £200 per month that would mean in 15 years they would have their home (current value £140,000) and £36,000 in cash.

Would 15 years of repaying debts and saving £200 per month with home ownership be better 15 years of no debt repayments with no home ownership with £1000 per month saved, if the result at the end of the 15 years is exactly the same net worth?

That's what I think it comes down to, with my mothers job being as safe as a job can be and eligibility for a good pension makes me lean towards the 15 years without debt being the better option, but then I'm very young and much prefer flexibility over security.

Anyway, thanks for the thoughts everyone, I'll put together a SOA asap and present everything you've all said to them regarding contact debt charities and a debt management plan and see what they think. Any thoughts regarding what I've said here are welcome