“Dear Steve,
Hello Steve. I’ll get right to it. I’m a 41 year old single male living in Las Vegas. I earn 72K a year. I have accumulated a little over 41K in credit card debt over the past 10-15 years. I have no assets. My credit rating is fairly good – in the high 600’s. I am not, and have not, been late on any payments. I purchased my home in 2005 for $255K. There is an identical house exactly like my model down the street from me on the market right now for $91K – so you can see how upside down I am on my house. I couldn’t move even if I had to! I have two mortgages on the house (had to take out 2 when I bought the house to avoid PMI) – my 1st is 6% and the 2nd is 9%. I have no car payment. Here’s the deal – I’m able to make all my payments! The problem is I’m paying the minimum amount due on my credit cards so I have some extra money every month as I have very little saved for retirement or emergencies. I’ve attached a list of my debts that include the balances, interest rates, monthly minimums, etc. I’ve also attached my budget. When you look at my budget you might say “Gee Jimmy – you still have an extra $700/month to pay off those cards”. It doesn’t always work out that way. Emergencies and unexpected expenses always seem to dwindle it down to a few hundred dollars. I know I need to budget better to anticipate these unexpected expenses and I am working on that now, but it’s still difficult.
I have a feeling you’re going to recommend consumer credit counseling (debt management). I’m still considering this but have a few concerns. First, I was told I would have to cancel all my credit cards – which I understand. But, they said I can’t even keep one for emergencies, travel, and car rentals when a credit card is required. Second, I’ve received conflicting information as to how quickly it comes off your credit record after I’ve paid everything off. Some people say they’ve never been able to get everything off their record even after paying all the cards off. Lastly (and a big one) – my job is secure right now. If I were to lose my job I would never get a job that pays this well again. If I enter into a 3 year commitment with the CCC agency and lose my job after a year what happens? I was told if you agree to the commitment and fail to finish it – your credit is screwed and they send you right back over to the credit card companies where you’re in worse shape than when you started. While I know CCC may be my best option, do you have any other suggestions to help get me debt-free?
I’ve used my cards very seldom over the past several years. I mainly use my debit card. I just don’t see how I’ll ever be able to pay these cards off. These debts are my responsibility. I used the credit knowing I had to pay it back. What ticks me off is they keep changing the terms (mainly the APR) which they know just keeps me in debt with them even longer – that’s what they want.
Jimmy”
Dear Jimmy,
You’ve given me a lot of good information. Thanks. But before I begin we first need to talk about the house situation. Do you want to be buried under that house or would you consider handing the house back to the bank and starting over?
We could tackle the other issues but the elephant in the room is you stuck in a mortgage that may take 15 years for property values to rise again just to break even on the thing. Would you rather pay on that mortgage or save for your future and retirement?
Please post your answer in the comments section below.
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Here is the latest on my situation (see my previous posts to get the whole picture). My pay dropped significantly – I went from making $72K to $42K a year. I had to wait 6 months at my new lower salary prior to filing as to fall below the state median income level (this makes filing easier as you don’t have to go through the entire means test). It is important that you do not have any disposable income when you file. I had a great attorney and would not recommend anyone trying to file by themselves. It’s well worth the money to have good legal representation. I went to the meeting of the creditors today and it is all done (discharge)! I haven’t paid a house payment for the past 8 months and, while I am in default, BOA has not even started the actual foreclosure process yet. I will most likely be staying in the house rent free for a year (I’ve heard some people going as much as 2-3 years without paying before having to leave the house). I did purchase a newer car prior to filing. My attorney suggested this because my last car was older and needing numerous repairs. By doing this would also explain to the trustee why I had little/no money at the time of filing and having a reliable car is good since getting a car loan after filing can be difficult if not impossible. Just don’t spend too much on a newer car (the limit in NV is $15K).
As for the house, I think I’m just going to ride it out, let them foreclose, and live rent free as long as possible to save up money. I will consider handing the keys back to the bank (DIL) only if they make me a good offer. Otherwise, the longer I stay, the more I can save.
Summary: If anyone out there is going through a similar type of situation, here are some highlights: It is a little stressful and there’s not much you can do about it – it’s normal to be a little stressed when filing bankruptcy. There is light at the end of the tunnel. Don’t charge on your credit cards cards knowing you’re going to file (this can be construde as bankruptcy fraud and you may be resposible for paying those charges and/or cash advances back and possibly having your case dismissed). If you buy a newer car, don’t go overboard (keep it under $15K). Get a good attorney – one you feel comfortable with, is detailed oriented, and don’t try to hide anything from him/her. Then do your best to try to relax. This was one of the best decisions I ever made. My credit will take a hit, but it won’t be bad forever. It’s a fresh start. I haven’t used a credit card (other than my debit card) in over a year – so it is possible to live without credit cards. My attorney says I’ll get offers for credit cards very soon when my case is officially discharged. There a two reasons banks will offer credit cards to someone who recently filed bankruptcy: they know you now have no debt and they know you can’t file bankruptcy again for I think it’s 6 years. I’m only going to get one or two credit cards and I’m only going to seldom use them only to help rebuild my credit.
I hope this helps anyone out there going through a similar situation. Sorry for the long post. If you have any specific questions, just let me know and I’ll answer you the best I can. I gained a lot of valuable experience through this process of stategically defaulting.
Thanks again Steve! I really appreciate your suggestions and guidance. You were the first person I contacted when things were starting looking bad, and I can’t thank you enough.  Â
Good on ya JV!
Just for clarity, the rule is 8 years between chapter 7 filings.
Thank you for the big update. You shared some great advice here.
Ironically people are so stressed about the bankruptcy option but once it is over they feel a huge weight lifted off their shoulders.
As a special favor, please come back often and comment on other reader questions so you can share what you learned.
Steve
Absolutely Steve, I will. I’m so grateful for your advice and suggestions, that is the least I can do. Thanks again!
Steve,
I spent a lot of time today thinking about what you said. I will meet with a bankruptcy attorney and see what they have to say. It can’t hurt to hear what my options are. Let me ask you this though – I would hate to “file” and have it dismissed. I read some articles on the Internet where this has happened to people. Then you have a bankruptcy on your credit record even though you didn’t actually go bankrupt. Do you know if this happens often? I look forward to your response and I will let you know what happens after I meet with the attorney. I know you hear this often, but THANK YOU for the help you offer. It is greatly appreciated. Oh, and “deal”! 🙂
Jimmy,
A bankruptcy attorney doesn’t want to put forward a case that’s going to get kicked back. It just ruins his/her reputation in the local court. I’ve heard of a Chapter 13 bankruptcy getting dismissed but that’s because the debtor didn’t make the agreed upon payment. But you’d probably go for a Chapter 7 bankruptcy anyway.
If you don’t like the bankruptcy attorney you meet with, find another one you do like. Just go to the appointment, ask questions and then go home and think about it. I want you to weigh your options carefully here and reach a decision purposefully.
There is a way out here but you need to know it is the 100% right decision for you so you don’t look back and feel like you made a mistake or missed an opportunity for a better life.
And you are more than welcome. My reward comes from you getting your life back because I know once you do, at some point in the future you’ll offer someone in debt a helping hand and advice.
Steve
Dear Steve,
I’d love to hand the house back to the bank and start over but I am concerned about the ramifications. I’m pretty sure I don’t qualify for a short-sale because I’m not in “financial hardship”. I am currently able to pay my mortgage payments. Even if I were to qualify for a short-sale, my credit would take a huge hit which would keep me from getting another mortgage. Many people here in Vegas are just walking away from their homes through foreclosure. I see their point to some extent, but I hear “foreclosure” is one of the worst things to have on your credit, outside of bankruptcy. A news station here did a story on a couple who “walked away” from their house when they were easily able to make their mortgage payments, they knew that the foreclosure would affect their credit, but rented the same model house down the street for HALF what their mortgage was. So yes, I would consider handing the house back to the bank, but how should I proceed and what are the consequences?
Thanks for keeping the credit card debt a separate issue, but that’s a lot of debt! What are your thoughts?
Thank you!
Jimmy,
Credit can be easily rebuilt given some time and some action on your part. You could go and do a credit counseling program but you hit the nail on the head with the program. Unless you pay off all your debt then you’ll still have debt if you lost your job along the way or something happened. And a credit counseling program may take you five years. In the same five year period you could have gone bankruptcy, handed the house back, and rebuild your credit. You should read “Fewer Than Ten Percent Get Out of Debt With Credit Counseling or Debt Settlement Companies.”
So let’s say you take the credit counseling approach and pay all the debt back plus interest. Guess what, at the end of the five years you still have an underwater house you’ll be stuck in and unable to sell if you had to or wanted to move.
The answer to your issue isn’t going to be found in what you assume but in what you want to achieve. If you would consider bankruptcy to handle the debt then you might as well hand the house back and stick the residual debt in the bankruptcy and get a total fresh start.
The process of deciding to walk away from the home is known as ‘Strategic Default’ and people are doing it a lot because they see no way to get out from under an impossible situation. This is the exact same thing corporations do when they restructure their debt and are applauded for taking action.
You don’t need to decide right now. What you do need is more information. I would suggest you find a local bankruptcy attorney and talk to them about your situation. They won’t charge you for the visit.
After the visit, let me know what you think and if it does not sound like the most logical and appropriate way to achieve your goals then I’ll help you come up with a Plan B. Deal?
Steve