Q: I took a buyout from my job and will be leaving soon. I'm thinking about walking away from my home and letting it foreclose, using my buyout money to start a home healthcare business, and borrowing more to cover start-up costs. This is the first time in my life I've had a financial opportunity like this, and I want to go for it. But would a foreclosure put my plan at risk?
A: Excuse me? It's one thing to seek foreclosure when you can't afford your mortgage, but to walk away from a legal obligation because it's financially convenient is just plain wrong.
You could run into legal trouble, too; some mortgages are "recourse" loans, meaning the lender has the right to sue the borrower to collect on the full mortgage amount. The fact that you indeed have money—the buyout cash—makes it clear you can afford to pay the mortgage. And I have found that when you walk out on an obligation simply because it is the easy thing to do, the energy follows you. Your plan has some bad energy to it.
Besides, foreclosing on your home will lower your FICO credit score. And that will make it incredibly expensive, or even impossible, to borrow any money for your start-up. You do realize that even people with sparkling FICO scores are having trouble getting credit right now? A low score will also make it tougher to rent a new place. Landlords may well slam the door in your face, or ask you to pay a higher deposit or rent.
Your next roadblock is a lack of working capital. That's money in the bank you can use to support your business in its infancy. Please tell me you don't expect clients to just materialize on day one and start paying all your bills. That is so not the way it works! At a minimum, you need enough capital to cover six months of expenses as you hustle to set up your business and actually get paid by clients. And in today's rough economy, I'd suggest you have a year's cushion. That's on top of the eight months of emergency savings everyone should have tucked away to pay basic living costs. If your buyout isn't enough to finance all of that—and make good on your mortgage—then you are not ready to start this business right now.