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My Mortgage Left Chicago on a Train at 9 AM Going 52 MPH. – Rick

Rick

“Dear Steve,

Bought a house for 325k, four years ago on an interest only arm loan of 256K, as well as a second mortgage for balance to avoid PMI (this second seems untraditional as it has a balloon payment of 45k due in 2020). This loan is a non Fanny Mae or Sally Mae loan, so we do not qualify under Obama plan for help.

We also owe 25K in all otehr debt (15 toward a car, 10k credit card). Arm loan changes in May 2010, it will cost us 600 a month more. We however do have 28K in the bank, and about 20K in retirement assets (401K). House value has plummetted to about 259 The homeowners are 33 and 35 we have been told payment will jump by 600 (low side estimate)? Fico scores currently in the 730+ range, and they are not going to help. this mortgage was secured through a bank.

Having a little bit of money tucked away but not enough to bring the amount due under the amount owed, how should I apply the money I have? If I have to default on credit payments(hopefully I can get house resolved prior to default) should I try to keep up with mortgage and default on credit cards?

Rick”

Dear Rick,

Man, this is like watching a train wreck about to happen in slow motion. It sounds like you’ve got two interest only notes on the house that will adjust upwards.

Refinancing is out since the house in upside down in value, you don’t have enough cash on hand to make a big enough difference in the loans, and it is doubtful that the real estate market is going to improve sufficiently for you to sell the house and get out from under the loans.

I think the most logical approach for you to take is to meet with a local bankruptcy attorney and talk about a Chapter 13 bankruptcy to strip the second mortgage off the house. This process is called “stripping the lien”, a “cram down” or a “strip down.”

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The bankruptcy court can strip the second mortgage and convert it to an unsecured creditor is the house value has dropped to or below the value of the first mortgage.

This approach should get you the room you need to make the adjusted payment when it kicks in. If that payment is too high for your scheduled Chapter 13 payments you can go back to your bankruptcy attorney and submit a modification to reduce your Chapter 13 bankruptcy payment.

Given the situation, that seems like a reasonable approach to an otherwise unreasonable situation.

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About the author

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.

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