In times of a recession and high unemployment, many consumers make it a priority to continue paying down credit card and auto loan debt--even at the risk of losing their home to foreclosure. That's because in a tough economy, many people see their credit cards as a lifeline to pay for food, clothing and other necessities, and they need their cars to get to work or to look for a job. Thus, some consumers, if forced to make a choice, are willing to walk away from their homes and become renters.
Mortgage Woes
About one in four borrowers were underwater on their mortgages near the end of 2009, according to Mark Fleming, chief economist at First American CoreLogic, a real-estate information company based in Santa Ana, Calif. Fleming told "The Wall Street Journal" that buyers who owe more than 120% of their home's value were prime candidates to default. The poor economy has made many consumers more likely to pay down their credit cards and auto loans before making their mortgage payment--a dramatic reversal from years past.
Tough Choices
Should you focus on paying down other debts at the expense of losing your home? Most consumer credit counselors would advise you to work with your creditors to satisfy all your debts.
Alternatives
Loan modification programs may provide some relief for mortgages that are upside-down because of falling real estate prices. Credit card companies may consider lowering monthly payments for card holders with financial hardships. Consider also selling your car and buying one that is less expensive.
Foreclosure Pitfalls
You may be subject to a significant federal income tax liability if you lose your home to foreclosure, according to the IRS. Also, your credit score will take a major hit, and because of the foreclosure it may be several years before you can qualify for a mortgage again.
Getting Help
Seek professional financial counseling help if you owe more than your house is worth, or you have to choose between paying your house note and putting food on the table.
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