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I Always Heard Not to File Bankruptcy. Now I Wish I Had. – Kathy

“Dear Steve,

I owe 2008 taxes & I’m not paying in enough this year. I need every penny of my take home pay and more to live.

A few years ago I took out a “mortgage based loan” to pay around $20,000 credit card debt. I have always heard “not” to file bankruptcy–I wish I had now!

RECAP: In 2001 I paid 53,500 for a home-took a mortg. of $46,000/30yr/fixed 7%. May 2008 I “Re-Financed” my house mortg.w/the mortg.based loan debt -for a total of (rounded up) $67,000/ 10yr/ 5.15% fixed. I have 104 remain pymts. a bal. of 59,900 (more than I paid for the house) The hm’s value is around $75,000 at this time.

Should I try to re-finance now at a lower int. rate? I have 3,000 credit card debt (2 credit cards) with interest rates at 26.99 & 21.99 %. I am making it by the skin of my teeth and only $150 a mo for food, gas, clothes,anything! I have no savings.

I know a single woman like me that filed bankruptcy 3 yrs ago for over 30,000 credit card debt.–now she is approved for bond money & the 8,000 credit & is looking at houses in the %150 range! Her credit score is higher than mine!

Would trying to file bankruptcy help me? The only way I am making my monthly bills is by not having taxes withheld from my payck when I owe car ins., or need tires.

My health ins., keeps going up along with taxes, gasoline, phone, etc. I have a land line & a pay as I go cell (not used very often) I don’t have the internet at home or cable TV. My car is (almost paid for),

If I had only known that bankruptcy improves your credit score and gets you free money to buy a house with—I am feeling really stupid and lost right now. I keep my utilities low. I am considering dropping my land line and health insurance to keep my home. I only need to make it 9 years!! But, how?

Any advice will be welcome!!! Thank you for listening– if nothing else! I know I have myself to blame. I’m thinking about selling my bedroom set ($600) but that isn’t a long term fix. HELP—GETTING DEEPER EVERY DAY !!

Should I re-finance my mortgage, file bankruptcy, or drop my health insurance, or find a bridge to jump off of?

Kathy”

The Answer

 

Dear Kathy,

The “bankruptcy is bad” myth is spread by the creditors that want you to pay, and the debt settlement and credit counseling groups that want you to pay them for their services. it is a self-serving rumor.

The lessons you have learned are things I say all the time and people have a hard time believing the truth since they here so many conflicting sales and emotional messages from others that want you to buy their product.

You are in a situation now that will require some serious intervention. Currently you are buying time by sinking yourself deeper in a dangerous hole with the IRS. If I read your statement correctly, you are knowingly having too little withheld from your check so you have more in your pocket each month to get by. At the end of the year, you’ll wind up having to pay the piper but this piper is spelled I.R.S.

The thought of dropping your health insurance is misguided as well. Without insurance, all it will take is one accident, illness or unforeseen event and you will be financial toast. Dropping health insurance is not smart and I never advise it. I consider it to be a priority debt.

The bad news is that you secured your credit card debt against the house with the refi where you increased the mortgage balance and refinanced the old mortgage. I doubt that a new mortgage is an option with your current debt to income ratio. The only way it would be is if your new loan you have now is a ten year loan and not a ten year balloon note based on a 30 year amortization schedule. In that case another refinance would not reduce your monthly payment, much, if any.

I think the solution here is a good news / bad news situation. The good news is that there is a solution without bankruptcy. The bad news is that you’ll have to sell your house. But the residual good news is that you’ll have some cash remaining to start over.

Since your old credit card debt is now secured by the house a Chapter 13 bankruptcy, that would allow you to keep your house would do hardly anything to reduce your monthly payments. In a Chapter 13 you need to make at least your regularly scheduled mortgage payment to keep the house. But wait a minute, that’s actually what is sinking you right now, isn’t it.

My bet is that you are not going to take this honest and truthful advice to heart and instead go off looking for a different solution or option. In that case you will become a perfect scam candidate. Someone who is looking for a magic solution that seems too good to be true.

It sounds like outside of the mortgage, your debts are nominal, 3K on a credit card. Besides, the car will be paid off soon but under the current situation, the ends just are not meeting.

So where do you go after you sell, you rent and regroup your life. One day you’ll own another house.

Please update me on your progress by posting updates here in the comments section of your question. I’m very interested in how this works out for you.


P.S. Be sure to read ‘The Secret of Surviving Through Difficult Economic Times. What I Learned On My Journey‘.

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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.

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