While the government tries to figure out how to bail out Wall Street, I’ve been working this year on ways to bail out three military families from debt that was crushing their spirits.

These families – unlike many major institutions – didn’t wait for a handout. Instead, they cut their expenses, ended their addiction to credit, and took responsibility for their poor money management decisions.

The couples agreed to participate in this year’s Color of Money Military Challenge and to expose their financial situations in exchange for help with their money woes. They are in many respects prime examples of the individuals at the core of the current financial crisis.

One of these couples, Amber and Trent Holmes, certainly are an example of what many home sellers are feeling right now. For more than a year, they have been stuck with a second home that they’ve been unable to rent out for enough money to cover the mortgage and taxes. They also have been unable to sell it at a price high enough to pay off the mortgage.

Amber Holmes said when they decided to upgrade to a larger home in the District of Columbia, they planned to keep their first home as an investment property. They figured the way housing prices were rising they wouldn’t have any trouble selling or renting the house.

They were wrong.

When they finally got the house rented after 10 months, they still had to kick in $1,000 a month to cover the costs.

The couple actually can afford the home they bought. They just can’t carry two mortgages and handle all their consumer debt. All of that debt lumped together put them in a precarious situation in which their monthly expenses were more than their take-home pay.

“I can certainly say that with the amount of debt that we had, we should not have purchased when we did,” Amber admits. “We did not take advantage of the subprime mortgage market. Our problem was with the market taking the dive that it did, there became a flood of rental opportunities thus making it very difficult to rent and command a rent that covered the mortgage amount.”

The couple, on my advice, finally decided to just take a loss and try to sell the rental home. Fortunately for them their current tenants want to buy it and have put a contract on the home. Unfortunately, with housing prices deeply depressed, the offer is $125,000 less than what they owe. So they have to do a short sale.

In a short sale the lender will accept less than the full mortgage amount, often forgiving what debt is left unpaid. Amber said they are waiting to hear if their lender will approve the deal. She said her lender told them it could take up to 60 days before they got an answer.

“I guess they’re not really eager to help when it’s not your primary property,” Amber said. “When you have people who are about to lose the roof over their heads and you’re seeking help on a second house, they don’t want to assist you until you’re in dire straights.”

Even if the lender does accept the short sale, there are taxes to factor in. Because the home is no longer their primary residence, they may have to pay taxes on any debt that is forgiven.

Usually, debt that is forgiven, or canceled, by a lender must be included as income on your tax return and is subject to tax. Last year Congress passed the Mortgage Forgiveness Debt Relief Act that allows borrowers to exclude from income certain canceled home-loan debt on their principal residence. However, only canceled debt used to buy, build or improve your principal residence or refinance debt incurred for those purposes qualifies for this exclusion.

But even with the tax bill, the Holmeses are better off selling and getting out from under the mortgage on the investment property. They can’t afford to keep supplementing the rent.