A couple's crushing debt

Your Money

April 01, 2007|By Janet Kidd Stewart | Janet Kidd Stewart,Tribune Media Services

When Stacie Lykins and Misti Mohrenne bought their home last summer, they thought they were on their way to the American dream.

But in a short time, the Eustis, Fla., couple hit some bumps in the road. A property reassessment sent their monthly home payments way above their projections, and a cooling real estate market along with a no-money-down loan means they could take a small loss on the house if they sold now.

Meanwhile, they've been piling up credit-card debt and have two relatively new vehicles with loans totaling more than their current value.

Like other couples struggling to make ends meet, they're looking at some belt-tightening and other maneuvers to free up cash flow.

Planning for the long-term future, such as retirement or college for Karrah (Lykins' 12-year-old daughter from a previous relationship) is a distant dream. Her other daughter, Kendra, 19, is already supporting herself.

As a police officer, Mohrenne is eligible for a pension plan at work, but she isn't sure how long she will remain on the force. Lykins, who works as an assistant to an adoption lawyer, has no workplace retirement plan.

Their assessment of their financial picture, as described in a letter requesting a Money Makeover: "bleak."

"We live paycheck to paycheck," Lykins said, describing the monthly anxiety over paying bills that leaves both of them feeling they should have been much further ahead financially by now.

The tension really increased when they bought their home. The couple had been renting for $1,100 a month, and they expected their new house payment to be about $1,200 a month. But that was based on taxes paid by the previous owner, who was elderly and qualified for significant tax breaks on the home. When the property was reassessed, their payment shot up to $1,500 a month.

That crunched a tight budget, and the couple's credit-card debt started creeping up to its current $9,707 level. Car loans, orthodontics payments, the mortgage and student loans round out the couple's other debt, for a total of a crushing $207,409 - which gives them a negative net worth.

So Money Makeover tapped Ann Laferriere, a certified financial planner and president of Griffon Financial Planning Inc. in Portland, Ore., to help stop the bleeding.

"There was heavy emotion in their voices when they talked about wanting to get to the point where they knew the money was in the bank to pay their bills," Laferriere said.

Emotions have been running so strong, in fact, that the couple even thought about selling the house and going back to renting. They also started looking into loan consolidation services to streamline their debt payments.

But Laferriere advised against both options and instead came up with a strategy for Lykins and Mohrenne to resolve their money crunch and set themselves up for a better financial situation down the road.

First, they need to talk with their employers about adjusting their tax withholding. On last year's taxes, the couple qualified for a huge refund - $5,200 - and that was with only a few months of mortgage deductions.

Rather than building up debt on credit cards during the year and then trying to pay it off with their refund, adjusting the withholding should give them an extra $500 or so per month to pay current bills, the planner said.

Psychologically, it could also help them curb spending to realize a big refund payday isn't coming next year.

Of that $500, at least $300 should go toward paying down the cards. Another $100 should go toward emergency savings in a high-interest money market account. (Laferriere suggested an online bank, which often pay higher rates. You can compare deals at www.bankrate.com.) The remainder should be used to help even out cash flow as monthly bills come and go.

Laferriere found another potential source of income in the couple's car loans. One of them, a $14,829 loan on a 2003 Dodge Durango, has a 12 percent interest rate. The planner thinks the couple can find a cheaper rate, at least 9 percent, freeing up another $37 a month.

Their other car is a 2004 Chrysler Pacifica. Both cars are fairly fuel inefficient and represent a huge overall cost relative to income, Laferriere said, but if they sold them, the vehicles wouldn't bring in enough to pay off the debt. So the planner suggested that Lykins and Mohrenne keep them in top condition and plan to drive them well past the time the loans are paid off.

"If they own them 10 more years or more, then they will have been a good investment," the planner said.

"There's an incredible opportunity to make a difference in their financial lives with these cars," she said. "If they get these costs down over the years, it could mean the difference between savings thousands for retirement - or not."

Laferriere recommended the couple transfer their credit-card balances onto one lower-rate card, rather than shopping for loan consolidators.

Baltimore Sun Articles
Please note the green-lined linked article text has been applied commercially without any involvement from our newsroom editors, reporters or any other editorial staff.