In 2007 Hank and Diana Cartwright* bought into the American dream. After having moved six times in seven years due to fluctuations in their income, they were thrilled when they were approved for a $285,000 no-down-payment mortgage on a four-bedroom home, where they planned to raise their two young daughters, now 5 and 7. "This is where we wanted to drop anchor and have grandkids come visit," explains Hank.

But as has been the case for so many homeowners in recent years, the Cartwrights' dream became a financial nightmare. Despite their steady jobs—they both work for their local school system—and combined net income of $6,476 a month, the couple found it hard to pay their mortgage of $2,641 while also covering their other monthly bills: $1,125 toward their whopping $37,000 in credit card debt, $700 for two car loans, $350 for student loan payments, and $300 for their daughters' childcare. In no time at all, the Cartwrights were drowning in bills.

So in August 2009, they were relieved when their mortgage lender agreed to put them into a trial modification (part of an initiative introduced in 2009 to assist struggling homeowners), reducing their payment to $1,450. During the next 14 months, as they waited to hear whether they would be granted a permanent modification, Hank and Diana faithfully paid their mortgage on time. Yet just a few days before I spoke with the couple last November, they had received notice that the bank intended to foreclose. The only way the Cartwrights could save their home was to resume paying the full $2,641 a month, and retroactively pay the amount that had gone unpaid during the trial period, as well as a barrage of surprise penalties and fees added on by their lender: a total of $38,000. With no emergency savings, they were out of options.

How had this happened? The Cartwrights' mortgage lender had approved the trial modification without verifying the couple's eligibility (to qualify, your mortgage, including insurance, taxes, and homeowners' association dues, must amount to more than 31 percent of your gross pay; the Cartwrights' did not).

They had been misled—but it was time to make a plan. I told the couple that the smart thing to do was let go of the house and find an affordable rental. They had never truly been able to afford the home, and had money problems even before they purchased it: In addition to their significant debts, Diana had declared bankruptcy in 2005. Hank and Diana needed to create a future rooted in financial responsibility. There is nothing wrong with renting, I told them, if it allows you to meet your financial obligations and goals.

The couple knew their choices had contributed to their predicament. "We have no one to blame but ourselves," Diana says. I'm not so sure about that. The bank that greenlighted a no-down-payment loan to someone two years out of bankruptcy bears some guilt here, too. But I applaud the Cartwrights' willingness to accept responsibility and move forward.

Here's the action plan I recommended

*The couple's names have been changed.
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