Ava, a Los Angeles single mother earning $142,000, called “The Ramsey Show” to weigh whether bankruptcy could be her way out of crushing debt.
She said she carries about $100,000 in credit card, a $4,800 mortgage and a $125,000 home-equity line for a backyard guesthouse. “I’m trying to see if it’s worth me possibly filing bankruptcy or just grind it out and keep paying debt,” she told co-hosts George Kamel and Jade Warshaw.
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Her monthly take-home pay is about $9,000 after deductions, for pension and insurance. More than half of that income goes toward her mortgage, and that amount does not cover the $1,100 payment on her home-equity loan.
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She said she still owes about $650,000 on the property, which she estimates is worth close to $1 million.
Ava added that she put down only 3% when she purchased the home and later refinanced to remove mortgage insurance, which pushed her interest rate higher. She also keeps between $9,000 and $12,000 in savings because she is afraid of going below that amount.
Kamel said the caller was focusing on the wrong fear. “You’re terrified of having less than 12 grand in the bank, but you’re on the verge of bankruptcy with a quarter-million dollars in debt,” he said.
Kamel urged her to think about selling. “I would sell before bankruptcy,” he said, adding that a sale could pay off the mortgage, erase credit card balances, clear the home-equity line, and cover her $15,000 in student loans. He explained that would leave her debt-free with significant cash on hand.
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The mother, who has an 11-year-old child, said the newly built guesthouse could bring in $2,500 a month once permits are approved. She hopes to use either long-term tenants or short-term rentals to cover part of her costs. She admitted, though, to worrying about safety and the possibility of squatters.
Kamel and Warshaw questioned the plan. They pointed out that even if the unit produced $1,000 in net profit each month, it would take about 10 years to recover the $125,000 spent on construction. In the meantime, the caller would still carry the mortgage and the loan payments.
