Sleepless nights. A knot in the pit of the stomach. A gnawing sense of unease.
Charles Phelan was familiar with the physical and emotional toll of debt. But usually it was his clients who were experiencing those symptoms. This time, it was his turn.
He owed more than $50,000 in credit card debt and knew it was time to make the same kinds of tough decisions he helped people in debt make every day. But that would mean giving up on his dream. Was he ready to make that sacrifice?
An expert on debt settlement, Phelan had been showing consumers how to negotiate lower payoffs on their debts for more than 17 years. As consumers’ financial lives melted around them, he would calmly help them see the bigger picture and make rational decisions about their futures. But now the downturn was hitting home — literally.
In 2010, Charles and his wife Marcia purchased their dream house, a 2,500 square-foot ranch in Escondido, Calif., with sweeping panoramic views. Gazing out at the mountains in the distance, he told his wife, “Coffin, or urn. You can pick either one, but the only way I’m moving out of this house is feet first.”
This hadn’t been an impulse purchase. Although the sales price of $654,000 may seem high to those living in other parts of the country, in his California community it wasn’t considered extravagant and it was well below the amount he had been approved for. Phelan’s business helping individuals and small business owners navigate the ins and outs of DIY debt settlement and coaching had been booming, and he had been working 12-15 hour days and his income reflected that. The worst of the real estate crash seemed to be over. The timing seemed right.
When they purchased their home, the mortgage was the Phelans’ only debt; their credit cards were paid in full, and they owned their cars free and clear. Even the new mortgage payment seemed reasonable; after all it was not that much more than the rent they had been paying.
But as much as Charles loved their new home, shadows of doubt began creeping in. One of the first signs came when he couldn’t keep food down for three days after they closed escrow. About a week later, a blood vessel in his ear popped, and could have led to permanent hearing loss except for quick intervention by a skilled physician.
A combination of personal and financial crises seemed to come one after another. His wife was experiencing health problems that required surgery. Business began slowing down significantly as the number of credit card accounts going into default began to plummet and fewer consumers were trying to settle their debts. The stress began to feel unbearable.
“But I come from a tough New England clan,” Charles writes in a detailed account of his experience on his website ZipDebt.com. “So I did what we do. I sucked it up and bulled my way through these challenges and ‘got it done.’ We bought the house, moved in, and that was it for me.” He continues:
It’s hard to see a bubble when you’re inside it. This was true of the real estate bubble, and it’s also true for individual industries when they hit a boom period. Conditions were good for a long time (in my business), long enough that I overlooked the old adage that past performance is no guarantee of future results. I made the false assumption those conditions would continue for the foreseeable future, and I was quickly proven wrong.
Over the next two years, Charles dipped into savings until the balance became “a shadow” of what it had been before. He had $120,000 in credit card lines of credit available, and he began using them. By the end of 2011, his unsecured debt totaled $18,600. The next year it climbed to $38,550. It stood at $43,000 at year-end 2013.
The Credit Score Conundrum
There was another problem: those credit card balances were causing Charles’ credit scores to slowly go down. He watched his credit score drop from 800 when he bought the house, “into the 770s, then 760s, then 750s. All this with never having missed a single payment.” The reason? His balances were getting higher in comparison to the credit limits, a crucial factor in credit scoring models. (You can see how debt is affecting your credit scores and monitor changes over time with a free credit report summary from Credit.com, updated monthly.)
So far, he had carefully managed his accounts to keep interest rates low and to protect his credit as best as he could from high balances. But from his work with clients, he knew that if just one of his issuers decided he was too much of a credit risk, they could slash his credit limit, and that could cause other issuers to reevaluate his limits. “Once that process kicks in, slow-motion disaster is the usual outcome,” he explains. “One creditor lowers your open credit to limit their risk, which makes your usage ratio even worse, taking another notch off your score. Other creditors follow along, and soon you are maxed-out where before you had open credit. Game over.”
Despite the debt, Charles and his wife still had a positive net worth thanks to the down payment they had put down on the house, and appreciating real estate prices that were gradually picking up. He kept enough in reserves that he could settle his own debt if it came to that. “I certainly did cut it close, however,“ he notes.
Charles knew he didn’t want to keep treading water forever and decided he needed to look at his situation the way he encourages his clients to do: by doing the math. “Numbers never lie,” he says. He also used a technique he teaches called the “three-year rule” where he imagined what would happen if he learned he had only three years to live. Would he choose to stay in the same situation for the rest of his life? The answer was, “no” and he knew it was time to think about selling his dream house.
Taking His Own Medicine
It took a while, but in mid-2014 the house was ready for sale. His credit card debt totaled $63,000.
The day they sold their house, he expected to feel some pangs of sadness and regret. But instead he felt profound relief. “I felt liberated,” he says. He was able to pay off the mortgage and the credit card debt, and with his savings accounts replenished by the sales proceeds, he and his wife decided to move to a small mountain town, Idyllwild, in the San Jacinto Mountains. This time they decided to lease a home for a while. His credit scores improved when the debts were paid off as well.
When he recently decided to share his story, a friend cautioned him against it, warning him that it might scare potential clients away. But Charles felt it was important to share how he used the same exact advice he gives clients. “In the end, it comes down to honesty. When you are facing a tough financial decision, the path to a solution begins with an honest look at your situation. You have to face reality, and that is simply not possible until you strip away all forms of emotional pretense and denial,” he observes.
And, as Charles has learned, it may require being willing to give up one dream for another. He used to just look at the mountains from his dream home, but his new home is in the mountains. He continues helping those in debt, and now when they describe their fears and the toll that stress is taking on their health, he can truly say he knows exactly where they are coming from.
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This article originally appeared on Credit.com.