Dire situation

[copaaz]

My wife and I have arrived at a crossroads for our family of seven. (5 children). Before I ask my questions I think I should share our situation and how we got to this point.

I am 34 years old and my wife is 33. We live in Arizona and own a small carpet cleaning business. My wife works and makes $55k a year. We have no savings, not much in investments (wife’s 401k which we no longer invest in and are considering withdrawing it) and we are in debt in the following:

Personal: $40k in consumer loans (credit card type)
Business: $30k in unpaid bills

My wife’s job is safe and we see no change in her current situation. My business is 4 years old. We started off slow (obviously) but built it quick and we were doing well. Two years ago we moved out of our 1400sqft home and purchased a 4400sqft home ($3100 mortgage) everything was going very well. We had about 25% of the personal debt then that we do now and zero business debt. Our business was doing very well, however we didn't save or invest beyond my wife’s 401k.

Now everything has fallen apart. My business has been down consistently 60-70% over the last year and these figures may be slightly conservative. We have defaulted on our home and will have lost it at the end of May. Our other house we rent out however we lose about $250 a month on it. It has a 2nd mortgage of $60k and is undervalued about $120k.

We own a '04 min van that is paid off and a truck that is not ($540 monthly payment) and are 3 months past due on it. Toyota is working with us and has pushed the payments to the end of the contract. We have been hanging on over the last 10 months and we haven't made a mortgage or even a lease payment. We are moving out May 31 into a $1300 rental. We have about $3500 in cash (after moving into our rental with the deposit and first month’s rent).

We have had financially issues only twice in our 15 years together however the first time was so minuscule it's hardly even worth mentioning and we wiggled out of it easily. This time around it is different. We are so overwhelmed we do not know what to do. We have become stagnant in our decision making. It has become paralyzing.

After the move our situation becomes even worst as this new expense is a rather large addition to our current living expenses. My credit score a year ago was in the mid 700’s as was my wife’s. Now we are around 560. We are considering bankruptcy but are uncertain. We are considered restructuring my business (a form of bankruptcy for businesses) to try to save it, however my outlook on the future of the nation’s economic situation is grim and I’m not sure if a “luxury service” will have value.

I guess I am more or less asking for guidance or advice than I am asking questions. If anyone out there would like to share their thoughts we are all ears. If I have left anything out and you have a questions, please feel free to ask. Thanks for reading.

[Bimmer]

How far under are you on the truck?

[creditcardfree]

Is there a reason that you can't move back into the 2nd home you own? What are the mortgage payments on that?

Would you be able to get a full time job, if you close the business? How much do you think you could make?

What are your other expenses? List everything, please.

[maat55]

A more detailed list of your expenses and income would help.

In general, you should sell the auto with the payment, look at getting a part-time job and move into the rental you own when possible.

You need to put aside the idea that you need a bigger house, that you need the expensive truck and that you can afford the lifestyle you have even in good times, you can't.

Cut your budget to the bone, cut up your CC's and sell everything possible.

I highly recommend that you read: The Total Money Makeover by Dave Ramsey and follow the advice.

[copaaz]

...and that you can afford the lifestyle you have even in good times, you can't.

When "times were good" as you put it we had a net income (after all expenses that is) of $3-4k per month so yes for about a good three years, yes we could afford it.

As far as moving back into the rental we have. That's is not possible. My mother-in-law lives with us plus our 5 kids. It won't work trying to cram 5 kids (one being a newborn) into 2 BR's.

I will get back online tomorrow and answer the other questions.

[Inkstain82]

How did you end up with $40k in consumer debt if you had a positive net income?

[minnie1928]

What are your other expenses? List everything, please.

I second this, the more information that you give us the better. Include balances, interest rates, etc. for the debt items. As far as expenses, list everything!

I would also recommend getting Total Money Makeover by Dave Ramsey at the library.

[rennigade]

When "times were good" as you put it we had a net income (after all expenses that is) of $3-4k per month so yes for about a good three years, yes we could afford it.

As far as moving back into the rental we have. That's is not possible. My mother-in-law lives with us plus our 5 kids. It won't work trying to cram 5 kids (one being a newborn) into 2 BR's.

I will get back online tomorrow and answer the other questions.

Not to be smart but there's plenty of room on the streets for your family. That 2 bedroom home doesn't look so bad now does it? The situation can't be that bad if you aren't considering moving to the 2 BR home.

Not sure what else to tell you. This is a good lesson for everyone out there not to bite off more than you can chew...or to even bite off what you think you can chew.

[ceejay74]

I think you could make the 1300-foot home work. Do bunk beds. Sell or toss everything you own except the barest essentials. What other rooms are there--living room, den, basement, attic? Convert everything except the kitchen and bathrooms (and diningroom if you can't all eat in the kitchen) into bedrooms. It's tight, but if it will cost less in mortgage payments than renting, I really think you should do it.

If however both mortgages on the smaller home come to more than the rent you're planning to pay, it might be better to let them foreclose on the smaller house too, or sell if you can make even a slight profit over what you owe.

It doesn't sound like you're certain that you'll make it, so whatever you can do to keep your family out of one of the Tent Cities is the way to go. Families your size can and do live in 1300 square feet, even less, and it sounds like it's time for extraordinary measures.

Looking forward to hearing the rest of your budget--exact income and monthly bills & expenses--there might be other stuff that you think you absolutely need, that it takes an outside perspective to see that you don't.

Good luck; I really hope you find a way out of this.

[disneysteve]

How did you end up with $40k in consumer debt if you had a positive net income?

I'm assuming that the debt didn't come until after the business took a downturn.

As others have said, we need to see all the numbers. What's the deal with the rental? How did you end up in a situation where you are losing $250/month? How much is it worth and how much do you owe?

[Scanner]

WIthout numbers, I'll take a stab: owning a business myself, I know if I was down 70-80%, then you are probably losing money every month vs. breaking even. Most business overheads run around 50%.

I had a real crappy Feb. and March so I know what you are going thru but my business has turned around (thank God).

You are going to have to close it and stop throwing bad money after bad money. I doubt carpet cleaning is going to turn around any time soon. Yeah, I guess people will "clean their carpet" vs. buy a new one in an economic downturn but I imagine most will just live with it. The business market would also just live it, I guess.

Nothing can suck a person dry like a business gone bad. It's worse than even credit cards IMO. Drop it and move on. No shame. Many successful people had 2 or 3 failed business ventures in their lifetime.

IN the future, you will have to control your lifestyle. You have 2 cars apparently less than 5 years old and a house that is, by all means, GARGANTUAN. Yes, you have a big family but a 4400 square foot house is too much to take on when you own a business that is prone to ups and downs.

[maat55]

When "times were good" as you put it we had a net income (after all expenses that is) of $3-4k per month so yes for about a good three years, yes we could afford it.

As far as moving back into the rental we have. That's is not possible. My mother-in-law lives with us plus our 5 kids. It won't work trying to cram 5 kids (one being a newborn) into 2 BR's.

I will get back online tomorrow and answer the other questions.

How do you have 70k of debt and a second mortgage of 60k if things were great. Your step up in lifestyle was more than you think. Your denial on a few issues(lifestyle, housing and auto) as necessary debts will keep you in trouble.

Were you living on no more than 90% of your income and saving the other 10%?.

I like you at one time, thought I was doing just fine but I was slowly going into debt. Once hard times hit, I found out just how poorly I was managing my personal finances.

Your in the position I was years ago where I had to make serious changes to get back on track. You need to lower your lifestyle(House, autos etc.) to where you are spending much less than you earn in order to get out of debt and build sufficient savings to with stand hard times before you move up in lifestyle.

Saying that 8 people cannot live in a 2 bedroom house temporarily is a mindset that will impead your recovery. Suzie Orman recommended that a woman with multiple children live in a 1bedroom efficiency in order to get back on track.

Fixing your problem will not be painless. When your mindset is one of determination, you will make the hard decisions it will take to get this fixed. Good luck.

[wnlbutterfly]

Can you raise the rent on the rental to at least break-even?

This is going to be a tough situation to work yourself out of. What were you doing before the carpet cleaning business? Can you go back to that? How old are the kids? Can the MIL help with any expenses?

[LivingAlmostLarge]

Actually maat, it depends. Some neighbor who doesn't like the noise could report that many people living in a 2 bedroom. Depends on where you live and the laws surrounding how many people per bedroom. In CA, it was 2 per room in a house for fire hazard or something like that.

So how are you so underwater if you make $55k/year with your wife's job and yet have no paid the mortgage or car for 10 months?????

Is it because you are paying the business to keep it going? Is that what the credit card debt is from?

[disneysteve]

Actually maat, it depends. Some neighbor who doesn't like the noise could report that many people living in a 2 bedroom. Depends on where you live and the laws surrounding how many people per bedroom. In CA, it was 2 per room in a house for fire hazard or something like that.

So how are you so underwater if you make $55k/year with your wife's job and yet have no paid the mortgage or car for 10 months?????

Is it because you are paying the business to keep it going? Is that what the credit card debt is from?

That's true. Many towns have occupancy limits. Putting 8 people in a 2-bedroom apartment may violate local code.

I think we need a lot more details here to discuss this any farther. The numbers don't seem to add up. An awful lot of debt was apparently incurred in a very short period of time. Hopefully, OP will feel comfortable sharing more info.