HELP! Do we file a Ch. 13? UNIQUE SITUATION.

[Fred10]

[momofthree]

Is there a reason you want to keep your home when you are $277k upside down on it???? Even with the lien-strip, you'd still be $160k upside down on it! Plus, add interest on top of that!

[Fred10]

Is there a reason you want to keep your home when you are $277k upside down on it???? Even with the lien-strip, you'd still be $160k upside down on it! Plus, add interest on top of that!

Good question momofthree. We thought about that as well, and yes we would still be upside down. Basically we love our home, neighborhood, schools, etc. We can stay here for 20 yrs, so with that in mind and then comparing it to the idea of having to short sale, move, and then eventually buy again down the road brings a lot of instablity to the family & kids.

The house will eventually go back up over a VERY long time so at one point we would be positive again, or at least that the assumption. When you couple that with the idea that we want to stay here long term, this is why we would keep the home.

But then again, these are the questions I want folks to ask. Based off this feedback, did you have any other perespective or advice to my situation?

***Sorry had to EDIT**

In your opinion what do you think makes most sense; doing the Ch. 13 and living with those consequnces and somehwhat resolving our negative equity sitaution on the house? Or just get rid of th house. Although with a short sale and or ch. 13 our credit takes a major hit. My logic is that at least in the ch. 13 we would get rid of second mortgage and all of our debt, on the other hand, or credit woudl be SHOT!

[blessed]

IF Chapter 13 would strip the 2nd and take care of your unsecured debt, I might do it.

I get that most people would walk away from a house with negative equity like that. But if you can easily pay for the 1st payment and the rest of your living expenses and are planning to stay long term, it isn't a horrible idea to keep it waiting for the market to try to recover. The benefit of stability for the family and keeping a "home" has a high price tag IMO.

I'd consider it and probably talk to another attorney even if you really like the first one you spoke with. Just to see if you get the same story from another objective source.

[LadyInTheRed]

This really is an individual decision. I am also upside down (house worth about $200k, owe $283k on first and 88K on second). Some would say that I'm crazy to keep a house with that much negative equity. They say it's a simple business decision. They may be right. But, I like my house, am settled after 5 years and don't have any plans to move. I am the type of person who stays put. After taking income tax deductions for property taxes and mortgage interest into account, I can't rent anything comparable, with a rent that is much less than my mortgage expenses. The house is very modest at 845 sq ft. I have no children to displace, but my 3 cats love the spacious back yard and wouldn't take well to being cooped up in an apartment with no yard. Neither would me and my husband. For me, getting rid of the $88k lien is worth 5 years in a Chap 13, even though I do pass the Chap 7 means test. If I decide someday that continuing to pay the first mortgage doesn't make sense, I can live rent free for a while and let them foreclose. More likely, between my payments of principal and the eventual slow increase in property values, I will gradually gain equity and pay off my house in 25 years, right about the time I am ready to retire. I won't care what the value of the house is at that point, just that I will have no mortgage or rent to pay.

Some things you may want to think about in your situation: Are you in more house than you can afford in the long run, even without the 2nd mortgage? Could you stand to move to something more modest while still being in a good neighborhood with good schools? When interest rates begin to rise, will you be able to pay your adjustable mortgage? Are there caps on how much the interest can increase? Will you be able to pay at least all of the interest so you do not go even further negative, regardless of market value?

Since your salary is over median, you will be in a 5 year plan. Why be a slave to the credit card debt? If you do a short sale, will you be able to pay your remaining debt in five years? That's a common test to determine whether you should go BK. A short sale will also screw up your credit. Your credit rating will recover after BK, apparently faster than most people think.

[Fred10]

IF Chapter 13 would strip the 2nd and take care of your unsecured debt, I might do it.

I get that most people would walk away from a house with negative equity like that. But if you can easily pay for the 1st payment and the rest of your living expenses and are planning to stay long term, it isn't a horrible idea to keep it waiting for the market to try to recover. The benefit of stability for the family and keeping a "home" has a high price tag IMO.

I'd consider it and probably talk to another attorney even if you really like the first one you spoke with. Just to see if you get the same story from another objective source.

Thanks for much for the feedback!I agree stability for the family is priceless. I am defintely going to get a second opinion from another attorney. Thanks again!

[Fred10]

This really is an individual decision. I am also upside down (house worth about $200k, owe $283k on first and 88K on second). Some would say that I'm crazy to keep a house with that much negative equity. They say it's a simple business decision. They may be right. But, I like my house, am settled after 5 years and don't have any plans to move. I am the type of person who stays put. After taking income tax deductions for property taxes and mortgage interest into account, I can't rent anything comparable, with a rent that is much less than my mortgage expenses. The house is very modest at 845 sq ft. I have no children to displace, but my 3 cats love the spacious back yard and wouldn't take well to being cooped up in an apartment with no yard. Neither would me and my husband. For me, getting rid of the $88k lien is worth 5 years in a Chap 13, even though I do pass the Chap 7 means test. If I decide someday that continuing to pay the first mortgage doesn't make sense, I can live rent free for a while and let them foreclose. More likely, between my payments of principal and the eventual slow increase in property values, I will gradually gain equity and pay off my house in 25 years, right about the time I am ready to retire. I won't care what the value of the house is at that point, just that I will have no mortgage or rent to pay.

Some things you may want to think about in your situation: Are you in more house than you can afford in the long run, even without the 2nd mortgage? Could you stand to move to something more modest while still being in a good neighborhood with good schools? When interest rates begin to rise, will you be able to pay your adjustable mortgage? Are there caps on how much the interest can increase? Will you be able to pay at least all of the interest so you do not go even further negative, regardless of market value?

Since your salary is over median, you will be in a 5 year plan. Why be a slave to the credit card debt? If you do a short sale, will you be able to pay your remaining debt in five years? That's a common test to determine whether you should go BK. A short sale will also screw up your credit. Your credit rating will recover after BK, apparently faster than most people think.

Thanks for the feedback LadyInTheRed. I appreciate the feedback and calling out that because of our income our plan would be a 5 year one, I was not aware of that.

Our house is modest (4 bedroom 2 bath, 1700 sq. ft), we didn't overspend on it, basically we bought an average house during the height of the housing boom, which is when house were WAY overpriced. On a long term basis we can afford to pay the 1st mortgage comforatbly. You point about interest rates rising a a good one. I think about that all the time because our loan is going to become adjustable in April 2012, so who knows where rates will be then. Which is another of my concern. But what I'm torn between is to continue paying money towards the second for another 2 year (basically $24K) to something that is a lost cause because the house will not get up to the value of both the first and the second for a VERY, VERY long time.

We can make an interest only payment on the 1st comfortably. One thing that is important to call out that I forgot to mention before is that even though we are still sending an extra $415 on the 1st mortgage to keep it from resetting, there is still a balance being tacked onto the loan every month. So by the time April 2012 rolls around the balance on the 1st will be $536K.

Here's the kicker my father in law has a house that we can move into and rent for as long as we wanted. Its a beautiful house, bigger than what we have, nice neighborhood, etc, but its not "ours". Our rent would be far less than a mortgage on the first and we would not have any prop taxes to pay. If we did this, we'd be able to save a lot of money every month in order to pay off credit cards in 2-3 years. My concern with a short sale (which I am not too familar with) is that they would say techincally we can still make the payment and or they would want to take our savings, cars, etc. I heard that a short sale is not as easy as it sounds, but really the issue is only with our house and the negative equity, because we can still make the payments on the cards.

Thanks again for your feedback!

[momofthree]

really the issue is only with our house and the negative equity, because we can still make the payments on the cards.

^^^This makes me wonder if you might end up in 100% payback situation. IF that is the case, you may want to seriously consider giving up the house. IF your loans were purchase money (not refinanced), then they should be non-recourse in the state of CA. In other words, you can live in the house without making payments until they complete foreclosure & kick you out (averaging 1-2 years in CA right now), walk away, and they cannot come after you for the deficiency balance.

At that point, your debts may be close to paid off, you can move into your in-laws house and save up to buy another home in the future, on a 30- or preferably 15-year fixed loan.

You may want to sit down and look at the math on this:
If you strip the 2nd, you'll owe $510k. I don't know your loan numbers, so I'll be extra conservative here and say you're at 5% for 30 years. (I know this isn't the case, and I realize that you're on an interest-only loan right now, so your actual numbers are going to be higher than this....)

$510,000 @ 5% x 360 months = $985,320 that you will have paid for this house....again your actual amount paid will be higher due to the type of loan you have now. This is the minimum....

Now, let's say you can rent a home for $1800/mo for the next 3 years and then buy a comparable home @ $350,000.

Rent = $1800 x 36 months = $64,800

House = $350,000 @ 5% x 360 months = $676,080 AND your payment will be about 1/2 what it is now.

Total cost = $740,880

Savings MINIMUM of $244,440 AFTER deducting the cost of renting until you can buy again.

OR if you went with a 15-year loan: $350k @ 5% x 180 months = $498,060

THAT would be a savings of $422,460!!!

Think what you could do with that money. Fully fund your children's college education? Take some amazing vacations? Retire 5 years sooner?

[Fred10]

^^^This makes me wonder if you might end up in 100% payback situation. IF that is the case, you may want to seriously consider giving up the house. IF your loans were purchase money (not refinanced), then they should be non-recourse in the state of CA. In other words, you can live in the house without making payments until they complete foreclosure & kick you out (averaging 1-2 years in CA right now), walk away, and they cannot come after you for the deficiency balance.

At that point, your debts may be close to paid off, you can move into your in-laws house and save up to buy another home in the future, on a 30- or preferably 15-year fixed loan.

You may want to sit down and look at the math on this:
If you strip the 2nd, you'll owe $510k. I don't know your loan numbers, so I'll be extra conservative here and say you're at 5% for 30 years. (I know this isn't the case, and I realize that you're on an interest-only loan right now, so your actual numbers are going to be higher than this....)

$510,000 @ 5% x 360 months = $985,320 that you will have paid for this house....again your actual amount paid will be higher due to the type of loan you have now. This is the minimum....

Now, let's say you can rent a home for $1800/mo for the next 3 years and then buy a comparable home @ $350,000.

Rent = $1800 x 36 months = $64,800

House = $350,000 @ 5% x 360 months = $676,080 AND your payment will be about 1/2 what it is now.

Total cost = $740,880

Savings MINIMUM of $244,440 AFTER deducting the cost of renting until you can buy again.

OR if you went with a 15-year loan: $350k @ 5% x 180 months = $498,060

THAT would be a savings of $422,460!!!

Think what you could do with that money. Fully fund your children's college education? Take some amazing vacations? Retire 5 years sooner?

Momofthree, great stuff, thanks again! The way you laid in out with the math really brings a lot of things to light. One question though, when you say that we :might end up in a 100% payback situation, do you mean that the payment plan set by the court in the Ch. 13 will be set at 100% of the debt we owe vs. 30-50%?

I have to run now but plan to reread your email when I come back as I have some other questions as well. Thanks again! All of this info is priceless!

[momofthree]

The only reason I wondered about the 100% payback is because there are a couple of ppl on here whose 100% payback payment is less than the minimum payments they were paying on their cards (due to interest and fees being waived). So, if you're already able to afford your credit card payments now, it makes me wonder if you'd end up with a high enough dmi that you'd end up paying 100% back to your creditors.

If you haven't already, fill out the means test and see what dmi it gives you. If that monthly dmi x 60 months equals $50k or more, then you'd end up paying all of your credit cards fully anyway...

I like this means test because it pre-fills all of the IRS standards for you based on the zip code & family size that you type in: http://www.legalconsumer.com/bankrup...o+Robles%2C+CA

[SMinGA]

It would not be a '100% payback' plan UNLESS the dmi allowed enough to pay off all unsecured debt. That would include the 2nd in a ch. 13.

A few others things I can think of...

I would suggest you consider other areas that may need adjusting in your budget. As things are now, do you owe taxes each year or get a refund? Paying an annual tax bill now might be something you can manage, but if your disposable income goes into a plan payment for the next few years you would not want to owe the IRS in the spring. So may need to adjust withholding.

Is your insurance appropriate, or does it need to be adjusted? Life, health, etc. I'm not suggesting you go and take a few million out in life insurance before filing to lower your DMI, but if you need to update insurance you can do so in a reasonable manner. Basically, a plan payment is based on your disposable income. But if your disposable income is high partially because you are neglecting some expenses - then its best to resolve those things in advance.

On your vehicle - how long ago did you take out the loan? Your first post & atty visit mentioned a cram down. That is ONLY an option if you took the loan out 2 1/2 years or more before filing. (Specifically, 910 days which is ~2 1/2 years.)

How long does your wife have remaining on unemployment? Have you considered your budget in a worst case scenario plan? That is, if UE runs out and she has not yet found a new job. A ch. 13 plan could be adjusted if that were to happen.

The 'nice' thing about a ch. 13 is that there is room for change. If you start out with the intent to keep/save your home and down the road a couple of months or even a couple of years decide that is no longer in your best interest, the 13 can be modified. Also, with a 5 year plan payment (if over median income = 5 years required) the BK would be off your report 2 years after the payments ended. A ch. 7 stays on credit for 10 years from filing, a ch. 13 only 7 years.

[Fred10]

The only reason I wondered about the 100% payback is because there are a couple of ppl on here whose 100% payback payment is less than the minimum payments they were paying on their cards (due to interest and fees being waived). So, if you're already able to afford your credit card payments now, it makes me wonder if you'd end up with a high enough dmi that you'd end up paying 100% back to your creditors.

If you haven't already, fill out the means test and see what dmi it gives you. If that monthly dmi x 60 months equals $50k or more, then you'd end up paying all of your credit cards fully anyway...

I like this means test because it pre-fills all of the IRS standards for you based on the zip code & family size that you type in: http://www.legalconsumer.com/bankrup...o+Robles%2C+CA

Thanks for the feedback momofthree! Well, based off your feedback as well as a second & thrid lawyers opinion I think we have come up withte final soltuion on which way we want to go. Believe it or not this came about through yoru post whcih showed the breakdown including the math, and most importantly the hypothetical about if we "were to walk away from the home". it forced us to face this question: "How attached are we REALLY to our home?". It was not anything easy to face, but this answer would have been an easy response stating "we are VERY attached and happy wth our home and can stay here for 20 years" if it wasn't for one thing, the size. We are already growing out the home with 2 kids (since one bedroom right now is a office den) and we know we want more. The initial plan when we bought the home was to build up with more bedrooms, etc. but that idea went out the window we we lost all our equity.

Our bigggest dilemma is that we made this house "ours" we've done so much to it, new flooring, painting (inside/out), my garage "mancave", outside stonewrork, crown molding, new windows, etc. These improvments are what really ties us to the home, but the fact of the matter is that the house is "screwing us", we are $277K upside down and this is the only issue we have financially. Every payment we make goes towards the house which is not gaining value, but still incresaing the loan amoutn with every neg-am payment we make.

So we used hytopthecials, we are rent from my father in law for $1500 a month in a 4 bedroom house in nice area. Is it our first pick of places to live, no, but still a great little place. The real plus side to this is that the house is loacted in the nicest part of the city so that a big plus. But assuming we do that for 3-5 years, we woudl be able to save anywhere from $30K-$42K per year based off the the savings we get from make a $1500 house payment and removing all other costs associted with home homeowner ship (prop taxes, alarm, etc.) Our credit will take a BIG hit with the foreclosure, but with the amount we can save we can pay off all or debt and start saving for a down payment so that after 3-5 years we have 20% or more down to put on a home. While our FICO's will take a big hit from the foreclosure, we would stay curernt with all our other creditors and pay off debt, essteniatlly keeping some of our credit history unaffected through paying off our debt.

THe only questions I still have, (which I am going to ask my attorney as well) are:

- I am current on my property taxes and a payment is due next month, since we are walking away from the home I woudl imagine that we would not want to pay them since that can be paid through the foreclosure by the new buyer, although how does not paying property taxes affect us? Can we ge sued by the county? Are there any other consequeces by not staying curent on property taxes?

- What can I take from my current property? I know that techincally antyhing "connected" to the house is considered part of the sale, but I ask because we did a lot of upgrades (and the rental we would move into is outdated) and would want to take the following, but not sure the lender/bank would come after us for it? My logic is that these items can be stripped from property by anyone after us prior to the foreclosure sale, and in addtion since the property will be sold at a foreclosure price these items in or out of the hosue will add no value to the buyer, but a bring a ton of value to us.

Kitchen Cabinents and Counter Tops

Bathroom's hardware

Toilets

Backyard Fountain

- Are there any tax consequeces at year end from walking away from a home and letting it go into foreclosure? My worry is that someway or somehow we will have to pay. WE have always gotten back $5K-$8K, but that was because off all the write off associted with home ownership.

Thanks again!

[SMinGA]

Consult a local atty to be sure - but you are probably liable for taxes as long as you own the house & it can take a while for the mortgage co to foreclose. Best to make sure before you stop paying taxes, as tax liens can be nasty on one's credit report.

[Fred10]

It would not be a '100% payback' plan UNLESS the dmi allowed enough to pay off all unsecured debt. That would include the 2nd in a ch. 13.

A few others things I can think of...

I would suggest you consider other areas that may need adjusting in your budget. As things are now, do you owe taxes each year or get a refund? Paying an annual tax bill now might be something you can manage, but if your disposable income goes into a plan payment for the next few years you would not want to owe the IRS in the spring. So may need to adjust withholding.

Is your insurance appropriate, or does it need to be adjusted? Life, health, etc. I'm not suggesting you go and take a few million out in life insurance before filing to lower your DMI, but if you need to update insurance you can do so in a reasonable manner. Basically, a plan payment is based on your disposable income. But if your disposable income is high partially because you are neglecting some expenses - then its best to resolve those things in advance.

On your vehicle - how long ago did you take out the loan? Your first post & atty visit mentioned a cram down. That is ONLY an option if you took the loan out 2 1/2 years or more before filing. (Specifically, 910 days which is ~2 1/2 years.)

How long does your wife have remaining on unemployment? Have you considered your budget in a worst case scenario plan? That is, if UE runs out and she has not yet found a new job. A ch. 13 plan could be adjusted if that were to happen.

The 'nice' thing about a ch. 13 is that there is room for change. If you start out with the intent to keep/save your home and down the road a couple of months or even a couple of years decide that is no longer in your best interest, the 13 can be modified. Also, with a 5 year plan payment (if over median income = 5 years required) the BK would be off your report 2 years after the payments ended. A ch. 7 stays on credit for 10 years from filing, a ch. 13 only 7 years.

SMinGA, thanks much for th reply. Between my wife and I we are above the median, even without her UI income. So I think the oru situation might a 100% payback, but either way to your point, even at 100% payback we would pay our debt back interest free which is a plus.

Great suggestions to modofy life isurance, etc. to maximize what's goign in our poskcets v. leaving it available as "disposable income".

Thank you for calling out the 2.5 yr cram down rule. We bought the car in Aug 2009, so I suppose cram down woudl nto be an option.

We haven't even gotten our first UI check from unemployment so if she was not not get another job, we woudl have that income coming in for 2 years. We have looked at things in a worst case scenario and woudl be able to scrape by making the minumums, but its good to know that a Ch. 13 can be adjusted if our income position changes.

Since my posting over the weekend, we've come to realization that we just got to walk away from the home, its the best thing to do. We can pay off all our debt and in turn save 20% or more for down payment on a house in a few years. In addition only our credit realted to mortgage will be affected, since we will be paying off all other debt. While we know the impact on our credit with a foreclosure will be signifacnt, it will allo us to stay current with our other creditors and minimze that impact on out FICO's.


Again, to eveyrone who posted advice, I truely thank you for the insight, I am VERY, VERY grateful. No one really needed to even post anything or be concerned with our problems, but its folks out there like you (SMinGA, momofthree, ladyinred, etc.) that provide us priceless advice, perspective, and hypotheccals. I am only 32 years old, so by 40 yrs old, I we should have gotten everything striaghend out and hopefully in a new home that does not have us upsidedown.

[Fred10]

Consult a local atty to be sure - but you are probably liable for taxes as long as you own the house & it can take a while for the mortgage co to foreclose. Best to make sure before you stop paying taxes, as tax liens can be nasty on one's credit report.

Thanks for the heads up! I have call in with my atty to get that clarified.