Short Sale? Foreclosure? Credit Card Debt Settlement?

Hello,

I apologize for this long post, but my wife and I can't sleep anymore due to our financial situation! And I have tried to find answers for our situation in the forum but I can't seem to bring it all together.

My wife and I are in financial hardship. I have been unemployed for several months, my wife has had a 15% pay cut, and my unemployment recently ran out. The job market locally is horrible -- I have not even had an offer locally -- and the only offers I have had have been out-of-state, so we would have to move. But we have been resistant to moving as we are way underwater on our mortgage.

In between looking for jobs I have been trying to start my own business. However, it has not gotten off the ground yet.

Here is a summary of our situation and some of our relevant numbers. In case it makes a difference we live in Southwest Florida:

1. We have 2 mortgages on our house (our only house and primary residence) totaling 300K (240K first and 60K second -- a HELOC).
2. Latest BPO on our house -- about 2 months ago -- was 170K.
3. Total credit card debt (4 credit cards) is 50K and rising.
4. No other debt except a car lease (3 more years).
5. Current DTI ratio over 80%.
6. We have trimmed our living expenses significantly.
7. Our savings is almost depleted -- credit cards are being used to pay necessary expenses and some bills.
8. Until last month, we have never been over late on any bills EVER!
9. Excellent credit score -- high 700s.

Last month we had to be late on both mortgages but ended up paying before the dreaded 30-day point. At that point I contacted both mortgage servicers to declare a hardship and found that we likely qualify for a Home Affordable Modification Program (HAMP) trial with the first servicer, and the second servicer would most likely qualify us for a loan modification if the first one qualifies us. But the amount of the monthly payment reduction to get to the HAMP front-end DTI ratio guideline of 31% would not reduce our payments that much. And our back-end DTI ratio would still be excessive -- around 75%.

So these are the options we are considering:

1. OPTION 1: GET OUT OF THE HOUSE. We would stop paying the mortgages and list the house as a short sale with a realtor we have talked to who specializes in that.
2. OPTION 2: STAY IN THE HOUSE. We would stop paying the credit cards and get with one of those debt settlement companies that say they can settle your debt for 40-60 percent of the original amount.

Here are concerns about OPTION 1:

1. We feel we have about a 50% chance of a successful short sale due to the current inventory of short sales/foreclosures on the market in our area -- and due to the fact that we have 2 mortgages. And if a short sale is unsuccessful I would imagine foreclosure would become imminent.
2. A big concern, if we stop making mortgage payments, wouldn't our current credit card issuers likely raise our interest rates and/or lower our credit limits since our credit score would be falling?
3. If we decide to try a short sale, we would have to rent a place. When would the best time to rent a place be -- now when our credit is still good? Or is it best to hang out at the house as long as we can until a sale of foreclosure is imminent?
4. And who would rent to us? If we rent now our credit report would still show the 2 mortgages we are responsible for -- and if we wait our credit score would be much lower due to the missed payments and maybe a settled debt (due to the short sale) or a foreclosure on our record.

Here are concerns about OPTION 2:

1. We are very skeptical on the validity of many of these debt settlement companies -- though I have been told that many are legitimate and really do work for some people.
2. Messing with the credit card companies scare us since we need to have at least one credit card to use. My wife travels for work sometimes and we sometimes have to travel for family issues (elderly parents).

We are not sure what would be the lesser of 2 evils -- or maybe we should consider doing both?

Our first instinct is to do what would be least detrimental to our credit score -- but maybe we shouldn't be?

1. If we get out of our house and rent somewhere we would probably want to rent for quite a while. We're not interested in buying another house anytime soon.
2. Or if we stay in our house and do a credit card debt settlement, we wouldn't be leaving the house anytime soon since we are so far underwater.
3. Isn't a good credit score mainly for getting more credit? That's the last thing we want to do now. We just need 1 credit card, that's all.

Overall, we are at a decision point now since we cannot afford to pay both our mortgages and our credit cards.

Again, I apologize for the long post.

Thank you in advance for any advice. My wife and I are all ears and want to start sleeping at night again!