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Should We File Bankruptcy When Our ARM Adjusts? – Mark

“Dear Steve,

Support and live with wife and 3 children–23, 21 and 14 years old. I am 48 yrs. old

Yearly income is $74,000/about $5050/month net

Current on all bills and payments–have never missed a bill payment of any type.

No extra money after bills per month. Job is secure but income will not increase much if any in the next few years

My 10 year old (2003) adjustable interest-only mortgage (currently $1336/mo. including property taxes) is about to increase by $950/month to $2300/month when principal payments begin in August 2013

2nd mortgage of $290/month will have 35K balloon payment in 2018 (5 years)–will need to refi/sell before that time

Total combined amount owed on house is 345,000, current value according to zillow.com is around 365,000. However, the home is old and needs a lot of repairs before it could sell.

Unsecured debt of $68,000 on 5 credit cards with APRs from 8-20%–currently making payments of $1400/month on these cards combined. This debt was accrued because was not able to afford original mortgage in first five years of mortgage anticipating refinancing and paying them off. Even though income increased steadily, this became impossible after the economic crash and house went underwater. Have been paying it off VERY slowly due to banks more than doubling the interest rates on the cards for no apparent reason.

Will not be able to afford both mortgage and credit card payments once new $945 increase in mortgage kicks in. Something has to give. After researching, Chapter 7 bankruptcy seems like the only realistic way to get a clean start. Not sure I could pay the credit cards even with a consolidation/settlement.

Main goal is to keep the house for as long as possible. A rental would be comparably priced unless it was much smaller–might save around $300/month–still not enough to pay the credit card bills.

What are my best options for Since I am still current on all payments, when should/would I file for bankruptcy?

Are there things I should do before filing for bankruptcy that can help me get the most benefit from it?

Is the house worth saving? Or should we try to sell it?

What other suggestions, if any, do you have for this situation?

Mark”

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The Answer

Should We File Bankruptcy When Our ARM Adjusts?   Mark

Dear Mark,

I agree with your assessment that unless you do something here, you are going to be screwed.

But I do have real concerns about the house. While you mentioned the cost of rent is comparable in your area I don’t think you factored in the additional savings in property taxes, insurance, or upkeep. When you add those items in then the rental becomes less expensive that holding on to the house.

The real question is if bankruptcy alone will do the trick and jump start your savings enough. See Debt and the Theory of Dissaving. Why You Need to Take Action.

Let’s say you file bankruptcy alone and keep the house. The issue is if that will free up enough money to allow you to get back to building your emergency savings, saving for retirement, and paying for all the needed upkeep and future mortgage increases which will come as interest rates rise.

Frankly, my opinion is if people need to file bankruptcy to get the legal fresh start they are entitled to then we should strongly consider if a total life reboot doesn’t just make logical sense.

Let’s say you let the house go and included it in your bankruptcy. So then you’d be able to create a new life that lived within your income and better prepare for the future by saving for emergencies and retirement. You could find a place to live now that was affordable and buy again in the future, but avoid the ARM or balloon notes.

Does that sound like a reasonable approach? It would certainly give you the most benefit from bankruptcy as far as quickly rebuilding a better life by learning from your mistakes.

Bankruptcy Articles and Posts You Must Read

To get ready to read the information below with the right frame of mind, please first read How Do I Get Out of Debt Quickly? Change Your Mindset.

Bankruptcy Advice

Life After Bankruptcy

Filing Bankruptcy Yourself

Please post your responses and follow-up messages to me on this in the comments section below.

Big Hug!

Should We File Bankruptcy When Our ARM Adjusts?   Mark
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About Steve Rhode

Steve Rhode
Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.
  • http://www.chs-law.com Carl Starrett

    With $68,000 in unsecured debt and a $74,000 annual income, I think bankruptcy is almost inevitable for you. From my perspective, the issues would be (1) timing: (2) Chapter 7 or 13; and (3) the decision to keep the house.

    Sometimes even people with limited income can still be forced into a Chapter 13 is they have very low expenses. I’ve seen people in the military with a $1700 housing allowance and only have rent of $600, giving them a huge surplus even after paying other necessary expenses like food, clothes and insurance.

    So here’s the dilemma: giving up the housing and moving to a rented home could free enough cash to require to to file a 13 for 3-5 years and thus delaying the fresh start. On the other hand, you might be filing Chapter 7 and still end up losing the house you you can’t afford the payment even with wiping out the credit card debt.

    if you let the house go, you lose the mortgage interest deduction on your taxes, so money you save in property maintenance and property taxes won’t be a dollar for dollar savings. I think you should look into the feasibility of refinancing the loans into fixed rate mortgages. This will help a local bankruptcy attorney advise you on the best court of action as well as determining if it is feasible for you to keep the house based on your current circumstances.

  • http://www.joetaxpayer.com JoeTaxpayer

    “increase by $950/month to $2300/month” – This should be illegal. A financial time bomb that was triggered ten years ago. In normal times, salaries might increase a bit faster than inflation. This change is a compounded 9.24%/yr increase for 10 years. Unless their was a dramatic change in income (say a spouse going to work after seeing the kids off to school) this wasn’t going to end well. I lay the blame at the feet of the bank and it’s people like this that we should bail out, not the too big to fail banks. His rate should be fixed, and the payment permitted to rise 3% per year. I think he’d figure out how to raise the $30 extra each year.

    Sorry for a rant, but these stories are awful. These are the good middle class folk that need saving.

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