Mingus
“Dear Steve,
So far I’ve been able to pay credit card bills (total balances over $150k) , my mortgage ($1 million jumbo) and home equity line on time and my credit score is still above 700. All accounts have good interest rates, even the credit cards have none above 7.9%. I no longer have the cash resources to make payments.
Which one do I stop paying first? As soon as I stop paying one of the accounts, will there be a credit death spiral where my only alternative is BK?
Mingus”
Dear Mingus,
You might not recognize it, since the first stage of debt is denial, but you’ve been in the debt death spiral for some time now. I suspect that you’ve been using your credit cards to pay for expenses that you otherwise could not afford.
Ultimately the plank is only so long and you’ve walked nearly to the end.
Just from the tone of your question I don’t think you have a lot of financial resources to fall back on so I’m going to answer assuming that.
Which debt to stop paying first is an interesting question and it really depends on a number of different factors. If it was simply a choice between keeping a roof over your head or making the credit card payments, then you should stop making the credit card payments.
But doing that will start a chain reaction that you may not be able to stop. That is not necessarily a bad thing, it is just a life readjustment.
I don’t think you have a lot of equity in your home and I have no idea if you want to stay in the home or if can afford it. If you want to stay in the home then you might need to consider a chapter 13 bankruptcy.
But ultimately what your situation boils down to is a good honest look at your income and life and an honest introspection if your lifestyle is sustainable on your income.
Easy credit in the past is not an indication that it was either right or affordable for you to have access to it. Having tons of credit cards, huge balances and a million dollar mortgage are not indicators of success or wealth, just debt and liabilities.
Bankruptcy is not your only alternative but before I can help you to plan a journey, I need to know what the destination is. Is the destination to adjust your lifestyle to live within your income or to continue the path you are on?
I’m here for you and will help. Just give me more information in the comments section about your situation, assets, and goals.
You are not alone. I'm here to help. There is no need to suffer in silence. We can get through this. Tomorrow can be better than today. Don't give up.
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Steve,
I searched your site for a story like this one (Mingus)that reflects closely to our own situation. We too, bought a new home on 2005 during the bubble. Our income had been stable for 20+ years, and increasing, and we had moderate savings and 401k. We thought it was the right home at the right time and had owned 2 other homes before this one; each time fixing, selling and trading up a little. This house was perfect and we thought it would be our springboard into retirement after we sold it when the kids were gone.
We couldn’t have been more wrong…
A year later, the bottom dropped out of everything including wage freezes for me with no bonuses, and no commision or bonuses for my husband. With 3 kids, we decided to take a chance and hold out for things to improve. We ran through or savings and used our healthy store of credit lines to suppliment our income until we could refi/consolidate or see a change in our income again. Now, a refi is out of the question (we’re underwater on our 2nd.) However, things are not changing that fast, we are maxed out and running negative. We have an appt with the BK attorney in a couple of weeks to talk about options. I, like Mingus, don’t want to go that route but would rather push the creditors of choice to the edge to buy time, then throw them a bone and stay out of court until we run out of options and have to file and lose everyting potentially. It’s ugly no matter which way we see it and it’s very depressing.
Ironically enough, I have been in finance at a local bank for 25 years and am currently a Collection Manager. I know the game but am reluctant to play it. Maybe BK is the cleanest way to go. I have worked out a budget to pay the mortgage and living/housing expenses based on our lower income plus 20% to the creditors but have no idea if that will be a consideration with the BK court.
Oh, and your advice to be nice to collectors is good advice. They are just people doing their job and most will work with you as long as you stay in contact and be realistic.
Jenn
Jenn,
Doesn’t irony just suck? The collections manager in trouble. No worries though, you are not the first person I’ve helped in a similar position. One of my favorite comments was from a woman I was helping and she got a call from a collection agent. She told the collector I was helping her and the collector said “I’m working with him to, isn’t he wonderful!” LOL. Small world.
Anyway, here is my take on what you’ve shared. It seems that your current approach of “playing the game” is more of a strategy than a solution. It does not solve anything and just pushes the same problem further into the future. It’s a bit like saying you don’t want to amputate an infected leg and instead wait and see if it gets better all by itself. Guess what happens. It doesn’t.
I think your situation requires manual intervention. Your equation has changed. The underlying property value has dropped, you no longer have equity to tap and your income is down. No trick or strategy is going to fix that.
The dangerous thing that has happened is that you’ve run through your cash and savings trying to keep everything as is. But as I said, it really isn’t as it was. Tapping cash to stay current and supplement income is a patch, like a strategy or game, not a solution.
You don’t need to decide anything right now by reading this. But consider this possibility. If you explore a Chapter 13 bankruptcy you may be able to reduce the value of your second mortgage down to the current market level of your house. You would also get a binding repayment plan for all your creditors based on what you can afford, not what they want. And ultimately isn’t that the best possible outcome from an impossible financial solution? Well, outside of me locating that damn magic wand that makes all problems vanish instantly.
Is this all ugly and depressing? Hell yes, but it is only because we allow ourselves to get stuck in the rut of misfortune. As of today you are not on fire and nobody has a knife to your back. What I’m trying to say is that this moment sucks but it could be so much worse. Let’s step back and look at the fact that you have some great kids, a loving husband, good friends and a family that cares about you. Take a few minutes and read through my sections on gratitude in my book “The Path to Happiness and Wealth.” The link is for a free ebook copy you can download.
This is just a phase in your life that you will have to live through and in retrospect it will seem much smaller than it feels right now.
Now for the guilt trip, enter into a real solution like bankruptcy, not for you, but for the kids. They need you to step-up and take action that will make their lives safer moving forward. This is it.
Steve
Great advice! If I stop making payments on all my credit cards, it saves me about $2,400/month. Perfect! Shall I block the collector calls? I have a Google Voice # that I can use for all my phone correspondence, so any call coming through that # will be a biz call. All the rest I’ll just ignore. Will this exacerbate the situation with creditors?
Appreciated… look forward to seeing you on the other side
Mingus,
Think about it from a creditor point of view. If someone was to start hiding, wouldn’t that cause you to alter your course or take specific action?
Just drift through collections. You want to be part of the herd, not a stand out.
Steve
Thank you for your advice Steve! I’ll recommend your site because you seem to understand these kinds of situations. If I let the credit cards go, should I use the services of a credit card mediation expert? I would imagine that at usurious 29-39% rates they will charge me over the next 6 months, my balance will be huge.
Thank you. If you let the cards go, you don’t use the services of anyone until you see you’ve got some cash available to begin making payments again. Just be polite to the collectors that will call. Don’t promise a payment you can’t make or afford. And kill the collector with kindness knowing that your goal is just to flow through the normal collection queue to buy yourself some time.
Once you make it out the other side, then let’s talk about the right professional to use.
I’m here for you. Keep me posted.
Steve
I’ve already made severe changes to our lifestyle to get to this point. I fully realized that taking on debt for living expenses to build this business was a big risk. I don’t mind having my credit shot down from its current 710, but I’m afraid that dealing with all the credit problems will adversely affect the 70 hours per week I’m currently putting into my business. Again, if I could get a loan of about $30,000 now, I think I can make it, but now I’ve maxed out on any credit card lines I can use.
A loan? Good luck.
But watch out, you fit the profile of the classic advance fee debt loan scam target. Desperate and confident.
Steve
First, I did purchase the house at the wrong time with 25% down in 2005… there’s no equity in it.
I have been building a good business that was sidetracked temporarily by the market crash/recession that started last fall. The cash flow from the business will actually put me into breakeven (around August-Oct) and beyond because my monthly income continues to grow. The problem is the classic “can I get to breakeven in time before it gets me?” I’ve always been confident of the business, I have been as frugal as possible but did build a huge credit card balance. Now I see breakeven happening in 6 months, but am very worried now that the credit card companies will turn against me because of the consolidation of previous c/c’s into Chase and others. I’m worried they will just close the accounts and force me to pay up.
I have a very short window to turn my financial situation around, and can confidently say if I had enough financial resources just to pay all these credit cards until October, I will be safely in positive cash flow situation. I don’t want to have it unravel before I get to that point.
It’s walking a tightrope. Why do I need your advice? Can I get to my breakeven October without sacrificing everything?
In that case, just let your cards go delinquent. You’ll have 6 months before they charge off, and in the meantime they might sue you but you can just deal with that latter. It won’t be bankruptcy and you can clean up the mess latter.
You can always contact your credit card companies and ask for special consideration or a payment holiday but that’s really not going to happen.
Grin and bear the collection pressure and the hit to your credit report and you might just make it through to your target date.
Steve
I Have $150000 in Credit Card Debt and a Million Dollar Mortgage …: So far I’ve been able to pay credit card b.. http://tinyurl.com/dl54wq
Nice Answer @GetOutOfDebtGuy I Have $150,000 in Credit Card Debt and a Million Dollar Mortgage. – Mingus http://tinyurl.com/dl54wq