My wife and I are in our early 40s and we are living pay check to pay check, despite the fact that we make a combined gross family income of $140,000. This is embarrassing to admit and we realize that we need to make some drastic lifestyle changes.

A few years ago we took out a home equity line of credit, which we tapped into for some home improvements as well as to consolidate credit debt. The line of credit was also used as overdraft protection for our checking account, which was a big mistake. Essentially, our line of credit ended up being a seemingly bottomless ATM machine.

Today our line of credit is maxed out at $106,000 with a monthly payment of $800. The balance on our mortgage is $236,700 with a monthly payment of $1700. Other debts include a MC with a balance of $20,000; three cars loans with balances of $23,000 (payoff Oct. 2011), $6,800 (payoff May 2011), and $2,000 (payoff in June 2008); a line of credit balance of $7,400; and a couple of department store credit cards with a combined balance of $2,000.

We have two children, ages 15 and 10, for whom we intend to fund college. While we have been investing in a 529 savings plan, we know we are not setting aside nearly enough to meet future financial obligations. Same is true for our retirement savings. Personal savings is nil.

My feeling is that we are so far in over our heads that it would be prudent to sell our biggest asset – our house – and use the proceeds to get out of debt. We could rent a comparable house in the same area for about $1,500 a month. In today’s real estate market, our house should sell for about $420,000, which would result in a profit of $77,300 after paying off the mortgage and home equity line of credit. Less a 6% realty commission and capital gains taxes, I believe we would be left with about $37,000, which could be used to knock out all of our outstanding credit debt except for the car loans. We would then sell our third car that has a balance of $6,800,resulting in our only debt being one car loan.

At this point, I feel that we would be in a position to be able to put aside significant savings for our children’s college fund, a future house down payment, our retirement, and an emergency fund.

Does this make any sense at all or am I missing something?

This sounds like a lessons learned scenario. If you are sure you can rent a comparable house for $1500 I would go for it.

Right now your house being your biggest asset isn't acting like an asset but is instead taking money from your pockets to such a severity that you are living from paycheck to paycheck, instead of seeing a continue growth of equity in your house; you ended up neutralizing that affect that makes owning a home an asset.

If you can honestly sell your house fast enough with how the market is today and still be able to stay afloat until it sells then I think you could benefit from selling your house even if you don't get 420,000 for it but end up getting just enough to cover your HELOC, Mortgage, and Commission. This will reduce your monthly debt by $1000, which will help you get situated again and pay off your other debts, like that MC which is surely eating up payments in interest unless you have a few cards with that limit and are rotating the balance via low apr balance transfer options.

The biggest debt you're facing is the house between the HELOC and Mortgage, your other debts are petty in comparison to this. If you can get the 420,000 you're asking for and can clear those other debts, even more fantastic.

Here is the only thing that you may be missing from this scenario:

How much did you pay for the house, is it your primary residence, how long have you lived in it in the last 5 years?

The reason I ask this is because you do not want to be hit up with Capital Gains taxes on this property.

If you paid $360,000 for this house last year, and you sell it for $420,000 you'll be getting a capital gains tax of $60,000 or so.

The way to avoid paying capital gains tax on selling your real estate is if you have lived in it for 2 of the last 5 years then as a married couple you're able to have up to around $500,000 in gains that aren't taxable.

If you are good in that area, I would go for it. You will have such a surplus of money coming in and almost no debt obligations that you will be given a fresh start and be able to hop right back in and purchase a house, this time I'm sure you won't make the same mistakes again.

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No matter what you sell off to reduce debt, if you don't change your buying habits you will be right back where you are now in a couple of years. This debt has been growing for some time, yet you also have two fairly new auto loans. You said yourself how the house has become an ATM. So has everything else in your "gotta-have-it-now" style of living. Until you get serious about making changes, this is simply a big band-aid.

With take home of around $7-8K after taxes each month, you have the income, you need to find some discipline. Start out by going 30 days without spending any non-essential dollars. This means no eating out, pack a lunch. No movies or special outings (you can survive 30 days). Sit down and write out how each dollar will be spent. x=> to this bill, y=> to that one. Stop investing until you get this working in your favor. You have to stop the outflow, before you will be able to reverse the trend. Live a week off the things in your cupboard. What things can you eat that are good for you and low cost? Review every expense and imagine how you could use those dollars to get out of debt. Do you all have cell phones? There's $400 you may not need to be spending. Do you have Dish or cable costs that are wasting your dollars? What things would you get rid of if you had to live off 1/2 your present salary? Now live off half and use the balance to start paying off those bills.

We all look at our lives and think we have cut back, yet if your income stopped or was seriously reduced, that reality you would have to live with. Self impose these restraints, or soon the choices will not belong to you.

I would sell your house and look at it as a lesson learned and a chance to start over.

I agree with Dru, you have to change your spending behaviour in order to avoid being at the same point a few years down the road. You need to adjust your entire financial approach.

One thing (and the majority will disagree with that):

Do not qualify your home as an asset. Period. The start of many financial problems is the point of view that your home is an asset and if it is your biggest investment (together with the belief that it is an asset) you are almost guaranteed to experience financial problems down the road. A home is the biggest illusion of wealth, especially in the middle-class.

If your balance sheet look fine due to the fact that you listed the value of your home as an asset you have some serious problems ahead of you.

I would recommend that you make some serious adjustments in order to avoid this scenario in the future.

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