Coach Her Out Of the House
Question: Al in New York City says his daughter and son-in-law are divorcing. There's $55,000 in debt and a house. Their lawyer has recommended bankruptcy. The mortgage is for $206,000 and is assumable. The home equity line of credit is for $39,000 and is not assumable. Should Al take over this mortgage?
Answer: The problem is not your second mortgage. The problem is much, much bigger than your second mortgage because what I do in these situations—because I've had to work with these folks five years later—is I look out five years and see where we're going. Let me kind of go above this a little bit, and we'll walk back down into the second mortgage and give you an answer.
Here's the problem. Out of all the divorce situations I've worked with over 20 years of financial counseling, the number-one mistake that people make is Mommy tries to stay in the home when she doesn't have the income to support the home. She does this from noble intent to try to protect the children's environment because their world is already upside-down due to Daddy leaving the home. She's trying to keep them from moving out away from their friends and their life being turned upside down. In an effort to do that, she tries to hold on to something she can't afford. There's an unintended consequence then, and that is all the other stress and problems that come into our lives due to that home that she can't afford end up causing the children more distress than us just admitting where she is today. Where she is today is she needs to move in to a very inexpensive two-bedroom apartment and start her life over on the basis of her income. We don't need to try to hold on to this house.
If I thought you writing a $39,000 check would make her life okay, I'd tell you to write it. But dude, you're not writing a $39,000 check. You're writing a $39,000 check and the opportunity to pay payments for $206,000 while your daughter stays in denial and doesn't get back out into the marketplace and deal with the fact that she's got to create an income to raise two kids because now she's a divorcee. None of this is going to turn out well. That's the problem. My heart hurts with you. You sound like a guy who can write that $39,000 check and not blink, and I would tell you to do it, but we're throwing good money after bad in a sense just because we're trying to minimize the pain and the turmoil created by this. If this was my daughter, I would much rather spend $40,000 helping her get into the next house two years from now after she's gotten on her feet and gotten her job and her life back in balance. It's painful advice, though, because she's hurting right now, those kids are hurting, and now we're telling them they've got to move too. She's not going to want to hear this.
The only way that it makes sense is if you look five years down the road. If we're just trying to stop their pain today, I'll write the check. But it doesn't stop it; it just puts it off. It just sweeps the dirt under the rug and there's a lump. There's a lump in the rug. It's going to come back to bite us later.
I'm going to coach her out of there. I would rather you spend your grandpa money and your big daddy heart—I love it, you're a good man—helping her set up her future that really probably doesn't include this house on a teacher's salary. That's where she is, and Bozo may or may not pay his child support. I sure hope he does so we don't have to put him in jail, but he may or may not do it.
If you want to go the other route, you're on the right track. Let them file bankruptcy, and you can buy that second mortgage out for probably less than $10,000. They can probably deed the house over to you. The trustee will probably abandon the house. There's probably not enough equity there in New York State to make any sense for him to keep it. You could probably end up with it chasing that second down post-bankruptcy. Whoever gave you that advice was on track mechanically speaking. I'd go above just the bankruptcy and foreclosure mechanics and try to ask where you're going to be with a single mom and two kids in five years.
