It was doomed to happen.  In 2005, houses routinely fetched $250,000 to $300,000 yet the median salary in the Lehigh Valley was around $36,000.  Given the miserable performance of this economy, it’s unlikely that the average salary has gone up much since then.

The housing boom here was out of control, no doubt about it.  A lot of people were relocating from New York City and its suburbs to the Lehigh Valley for its lower taxes and lower cost of living, but because these folks who were used to paying $600,000 or more for a house didn’t think twice about paying $300,000 for a house that just 10 years ago might have gone for $130,000.

To make a long story short, the New York contingent artificially inflated the sale price of homes.  The New Yorkers are not totally to blame for this however, interest rates were kept artificially low by the Bush administration and borrowing money was never cheaper.  Another factor that went into this was the rampant fraud and the fact that you could have zero proof of income, no down payment, and qualify for one of these variable rate mortgages.  If Bernie Madoff had come up with this, they would’ve given him the chair.

So that brings us to today.  The same houses that were selling for $300,000 are now down in the $180,000 range, and I think they’re probably still too high.

A client came to my office on Friday.  He is a single man with a three bedroom 2 1/2 bathroom house in Allentown.  He hadn’t made a mortgage payment in a year, but now he was back to work in able to make his payments again, kind of.

My clients mortgage payment was $1105 per month.  He had a second mortgage of $242 per month.  His weekly take-home pay was somewhere in the neighborhood of $500.  If you’ve done the math you can probably see where this is going.

To make a Chapter 13 plan work for my client, he would have needed to pay a minimum of $300 per month and probably more to the Chapter 13 trustee.  With take home pay of $2166, my client would have expended close to $1900 per month just to stay in his home.

Clearly Chapter 13 bankruptcy wasn’t going to work for this man, however he had a 401(k) with about $100,00o in it.  He asked me if he should take a withdrawal from it to pay the past the past due on his house to stay in his home.  Looking at a situation, I had to tell him no.

Here’s why, he was going to dip into his retirement, something the Chapter 13 trustee cannot touch and very few creditors can go after, to save a house that he owed $30,000 more on than it was worth, and moreover, a home that he really did not need.

What was a bachelor doing a three bedroom two and half bathroom house?  He had never been married, his girlfriend lives in another apartment, so really he has a house way too large for his needs.   Now if he were financially able to keep the home, I wouldn’t care, because generally speaking real estate is one of the best investments out there, especially now, but this man was going to struggle to pay his mortgage even after taking a loan out of his retirement.

The bottom line is this, I could have taken the man’s money and filed a Chapter 13 bankruptcy for him, and it might have even worked. Chapter 13 bankruptcy is not for everybody, neither is mortgage modification, you may feel bad or a responsible for letting your house be foreclosed on, but the banks were just as irresponsible in their lending.  The banks went to the government and got a bailout.  No one asked your opinion when they took your tax dollars to bail these people out, nor did they offer you one (and its not coming either).

Sometimes it’s best to let the banks foreclose on the property, I know it hurts, but rather than spend $1400 per month on a home too large for him, my client is going to find an apartment in the $600-$700 range which will work for his budget and will allow him to regroup financially.

Once a foreclosure is over and my client has resettled, I advised him it was in his best interest to file Chapter 7 bankruptcy.  My client racked up nearly $30,000 in credit card debt trying to save his home. If he made the minimum payments, it would take in 35 years or more to pay his credit cards off.  Furthermore, some of the credit cards had been charged off and sent to collection and some of these agencies have become sue-happy lately.

Again chapter 7 bankruptcy is considered by some to be irresponsible, but the reality is these banks were irresponsible lending money to people who couldn’t possibly pay it back.  We don’t have debtor’s prison in the United States for reason, don’t allow yourself to be put in a debtor’s prison without bars.

Hopefully my client will take the next logical step and follow through filing Chapter 7 bankruptcy as we discussed at the meeting.  If you are unsure about your situation and want to know whether or not it makes sense to even just try to stay in your house, call 484-661-2891 for your free no obligation consultation.  You can also e-mail me at Jim@padebt911.com.  All contacts are kept strictly confidential.