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The Waterses' Plan

Starting Over, Late

Peter and Carolyn Waters have big debts and no savings.

They can’t afford their lifestyle.

Time is slipping away.

Carolyn Thomasson liked many things about the profile she spotted on in September 2002. She liked Peter Waters' photo and the fact that he enjoyed travel. She especially liked that he owned his own business. Financial security was important to Carolyn, a long-time divorcée living in Charleston, S.C.

Uninterested in remarriage in prior years—“I didn’t want to put my kids through the dating scene,” she recalls—Carolyn had supported her four children with various jobs, from retail sales to babysitting. “I’m Lebanese. A strong family and a strong work ethic are central to our culture,” she says.

But at 56, with the kids grown, Carolyn was open to finding a life partner. She e-mailed Peter, attaching her own photo.

A widower since the previous year, Peter, then 58, owned Chocolate Perfection in Oyster Bay, New York, a business he and his late wife, Irene, started in their garage in 1982. The company manufactured private-label confections for high-end department stores such as Neiman Marcus and Saks to sell and for businesses to give away as promotional gifts. The company prospered, and Peter and Irene, childless, enjoyed their six-figure annual profits to the hilt, spending on luxury cars, artwork, jewelry, and fine dining. “We acted like people in our 30s, even as we approached our 60s,” says Peter. “We didn’t think much about the future.” Alone after Irene’s sudden death at age 58, he was pleased to hear from Carolyn. “Gee, you’re cute,” he replied, “but you’re so far away. How are we going to hang out?”

They managed. Within a few months, Peter had moved himself and his business to Charleston. The two married in June 2003. Unfortunately, financial security has eluded the couple. With a combined annual income of $84,300, they are virtually insolvent. Due to business reversals, Peter has become an employee of the company he once owned. Carolyn manages a local furniture store. Burdened with heavy debts, a lifestyle they can’t afford, and a dwindling timeline for turning things around, they are struggling to retool their lives.

A Fateful Loan

When a 1998 fire devastated the 4,000-square-foot warehouse then housing Peter and Irene’s chocolate plant, they used the opportunity to grow their business. They moved to a space five times larger and invested in new equipment. The $200,000 insurance settlement from the fire fell short of the expansion costs, so the pair got a $125,000 loan from the Small Business Administration (SBA).

Irene’s unexpected death in 2001 created more than a personal loss for Peter. “The terms of the SBA loan meant the $95,000 balance came due right away,” he says. “I renegotiated the contract, but my overhead was high, business was slow, and I couldn’t keep up.”

In early 2003, he defaulted, and the SBA soon obtained a court judgment against him. Peter’s reaction: “I was in love with Carolyn by then and burned-out on New York anyway, so I decided to relocate.”

Peter was able to sell his New York home, his main asset other than his business equipment. He netted $100,000 and—despite the court judgment, which has not been enforced to date—used it to move himself and his business south.

A Maxed-Out Lifestyle

Initially, the couple lived in Carolyn’s three-bedroom townhouse. Then, in July 2004, they sold it for a $40,000 profit and bought a $314,000, four-bedroom home in nearby Mount Pleasant, putting in just $30,000 as a down payment. Because the SBA judgment against Peter had been reinstated in South Carolina, Carolyn had to get the mortgage in her name alone—and she succeeded, even though the monthly payment on the $284,000 loan (at 6.5 percent, fixed, for 15 years) was $3,180, more than her take-home pay on her $44,000 salary. The couple counted on Peter’s income to cover the rest along with all other necessities of life and such extras as trips to visit Carolyn’s family, a country club membership, and cable TV.

Unfortunately, Peter’s profits fell short. Relocating the business was more costly than he anticipated. They began spending their savings and buying on credit. Then the 2008 recession dampened demand for Peter's fancy candies. The couple tightened their belts, paring non-essentials. Still they were strapped for cash. By early 2009, they had burned through all their capital—other than $2,500 in Carolyn’s retirement plan at work—and run up almost $50,000 in credit card bills.

Vanished Assets, Rising Debts

In May, Peter sold his company for just $15,000, using the money to hold off creditors. “The equipment alone was worth many times that, but I just couldn’t hang on any longer,” he says. The new owner offered him $45,000 to run his former company for one year, and Peter accepted. The steady income helped, but even with cutbacks the couple was spending about $1,000 more each month than their roughly $5,600 take-home pay.

Their non-mortgage debts now total nearly $150,000. The $31,771 remaining on four now-canceled credit cards has been sold to collection agencies, ruining their credit rating for years to come. One still-active card carries a $5,000 balance.

The only substantial asset remaining is their home. The pair managed to pay down their original $284,000 loan to $240,000, but recent missed payments plus penalties and interest have re-inflated the outstanding balance to $265,000. Meanwhile, the home’s current estimated value may be as high as $340,000 or as low as $304,000—one reason the couple has resisted selling. They are convinced their best prospects lie in waiting for a price rebound. “An $80 million medical center is being built nearby,” notes Peter. “When it’s finished, in a year or so, we should be able to get a much better price from one of the incoming doctors or administrators.”

Too Many Uncertainties

In October 2009, the Waterses got some good news. Their application to modify their mortgage was approved by their lender. They got a roughly $1,000 reduction in their monthly payment to $2,200, bringing their monthly outgo closer to their income. Neither the loan principal nor the interest rate was adjusted, however, and the rollback is only for a trial period of three months, ending in January. “If we meet all the payments, it may be extended for five years with new loan terms,” says Peter.

Even with lower mortgage payments, the couple still faces financial peril. Peter’s employment contract expires in May 2010. He expects it to be renewed at a higher salary, but neither the renewal nor the raise is assured. Their budget is already extremely tight. Without Peter’s income, it would be impossible for them to keep up house payments. And without a substantial salary boost, they would only be treading water, unable to get out of debt, much less put aside any savings.

One possible cash infusion is an inheritance from Carolyn’s sister, who died in October. The will must be probated in Texas, where she lived, and final bills must be paid. That process is likely to take at least a year. Until it’s complete, Carolyn says she will have no idea how large a bequest she and her two brothers will share.

The Plan

Focus on facts, not hopes.

Downsize now.

Pay off debts ASAP.

Work until 70 or later.

Don't give up.

Be realistic

At the moment, with their income barely covering expenses and debt collectors pursuing them, the Waterses are under constant stress, says Diane Blackwelder, a certified financial planner with Charleston Financial Advisors in Charleston. “It’s tough for them to accept that they’ve hit a wall,” she says, “but to regain peace of mind, they need a lifestyle they can afford, so they can start to pay off debts.”

They also need to postpone retirement indefinitely to rebuild savings, says the planner. “Without a nest egg to draw on once they stop working, they’ll have to live on Social Security alone, and even that option assumes they’re debt-free.”

Peter has consulted an attorney about declaring bankruptcy for himself alone—not Carolyn too—but is not convinced it’s the right path. “It’s a consideration, but a remote one right now,” he says, citing the cost of filing and the fact that he has no assets for creditors to attach anyway. The couple may be able to accomplish a de facto “debt workout” on their own, says Blackwelder.

Carolyn fights despair with a drive to make progress: “It looks like we’ll have a problem for the next 10 or 20 years, no matter what we do,” she says, “so we need to find options to weather that problem.”

Sell the House Now

The Waterses’ house is an attractive property in a good neighborhood. Blackwelder concedes that they are probably right that its value will get a boost once the nearby hospital is completed. But she adds, “that’s the wrong number to focus on.”

In their eagerness to clear a profit on the house, the couple is ignoring the ongoing cost of owning it, she explains. Even with reduced loan payments—only temporary at the moment—it costs them more than $2,500 a month to live there. With no room in their overstrained budget for emergencies, one missed mortgage installment can easily cascade into foreclosure. “They could wind up losing the house anyway and possibly wiping out any equity too,” says the planner. “Meanwhile, they have no cash left to pay down their other debts.”

Blackwelder estimates that monthly rent on a comfortable local apartment would be no more than $1,400. Adjusting for the lost tax deduction for mortgage interest, that would trim perhaps $800 from their monthly expenses, money they desperately need to jump-start their financial recovery.

It’s understandable, says the planner, that the couple is reluctant to trade homeowning for renting, especially since their credit history will make it difficult to obtain another mortgage. However, Blackwelder doesn’t rule out a future home purchase if Carolyn’s expected inheritance allows them to pay cash.

Get Debt Off Your Backs

Although Peter has made no attempt to settle with the SBA, he thinks that the agency might accept about 30 percent—$28,500—in full payment of the eight-year-old $95,000 debt. It wouldn’t be unusual if the credit card debts sent for collection could be settled at 50 percent, or about $16,000. Those amounts plus the $5,000 on the couple’s active credit card would total about $50,000. If the house sells for $340,000—the upper end of current market estimates—paying off the mortgage would leave them with roughly $55,000 after closing costs. If the debts can be settled as assumed, that sum would allow them to repay all their debts except some family loans, but “that’s a lot of ‘ifs,’ ” notes Blackwelder. A lower selling price for the house would yield a much slower pace of debt repayment.

Work Longer

Once their debts are cleared, the Waterses can begin saving. Blackwelder estimates they’d need about $250,000 to cushion retirement, a formidable figure for late starters. They are both healthy, and she recommends they work as long as possible to put as much money in reserve as they can. Carolyn’s job seems secure; Peter’s employment contract may or may not be renewed when it expires in May 2010, so the planner suggests he scout other opportunities and perhaps even think about adding a part-time job. “You can’t afford to be without earnings,” she warns.

Neither Peter nor Carolyn should consider applying for Social Security payments at age 66, when each is eligible for what’s known as full benefits, says Blackwelder. She advises both partners to max out their benefits by working full time at least until age 70, when each can collect roughly $26,000 a year—nearly a third more than their benefits at age 66. “That’s extra income for life that you can’t afford to pass up, especially since one of those two checks will stop with the first partner’s death.”

Stick With It

Through disciplined effort, the Waterses can gradually regain their financial footing, says Blackwelder. Peter and Carolyn have a lot going for them, she notes: “They are self-starters who have already demonstrated resilience in the face of setbacks, and there are two of them to earn and save.”

She offers encouragement in the form of two proverbs. Don’t focus too much on the negatives, she advises: “Success is not just a matter of having good cards, but of playing even a poor hand well.” And don’t think it’s too late to restart your lives. “The two best times to plant a tree are 20 years ago and today.”

To follow the Waters' progress in their Money Makeover, read updates at the Payoff.

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