Should I short-sale or default on our home to start rebuilding our savings?

10 months of unemployment and my wife losing her job at the same time has wiped out our savings accounts as a family. I’m 37 years old, married with 2 toddlers, zero savings, and was able to finally find a 50k/year job in I.T., but bills, health care costs, everyday expenses, and mortgage payments eat up almost my entire paycheck with little room for any sort of savings. Our home was purchased in 2006 for 215K and is currently underwater roughly 50K-60K, with it’s value still declining. My wife and I are extremely frugal with our spending habits and she’s staying home now to raise the kids. I’m extremely concerned over the fact we cannot save any reasonable amount of money for those life emergencies that pop up…car, house, health, etc. Not to mention thoughts of our kids and college, or even retirement.

I’m afraid that if we don’t get out of our house and downsize, we’ll never be in a position to start saving properly again. Sure, my wife should be able to go back to work in a couple years once the kids are in school, but I’m afraid we may end up in a credit card hole by the time. I don’t see the value returning to our house over the next 10-15 years and that’s a long time to fore go any sort of reasonable savings plans. Looking for thoughts.

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