What to expect in Foreclosure and Bankruptcy?

[chicago513]

Hi, I’ve read through a lot of the threads looking for the same type of situation as me but of course it seems that everyone’s situation is a little bit different. I’m really looking for some advice from some people who’ve been through this or are currently in the process. My wife and I have 3 young kids and our financial situation is as follows:

Annual Income.......75,000
Home Value.........105,000
1st Mortgage.......145,000
HELOC..................22,000
CC Debt................24,000
Student Loan..........4,500

The interest rate on my 1st mortgage is 3.4% variable, and the HELOC is 1% variable. I know they are pretty good rates (for the time being) but I’m basically underwater by $60,000 and in Illinois if I walk away they can come after me for the difference. My plan is to stop paying on my mortgages and file bankruptcy around foreclosure time, which I was told will be at least a year in IL. This would basically save me $80k. It will ruin my credit and relationships with the neighbors but I feel this is what is best for my family. I don’t have much savings but IRA, 401K, and kids’ 529 plans.

I guess my questions are:

1. As I am planning a BK7 one year in advance is there anything I should do starting now? Is there anything you wish you did earlier?
2. Should I start contributing more to retirement and kids college plans, pay off student loan? Could that be considered fraud or would it be pre-bankruptcy planning?
3. Does anyone have any advice as to what to expect coming down the line that you may have found unexpected?
4. My wife and I have been planning a vacation with the kids in a month or two. We wouldn’t be filing for at least 6 mo after, does that look bad? Can anything come of it?

Thank you so much for reading and (hopefully) responding. I know if you are reading in this forum you are probably in a similar situation and I wish you luck.

[BobMango]

First off I'd like to say that you are miles ahead of where I was when I made the realization that my financial situation was unsustainable.

I would definitely stop increasing balances on credit cards. Easier said than done if you are looking at filing a year out, but maybe some other changes would help.

If you are sure that you will need to file and will be a Chapter 7, I would definitely make sure that I was putting the most I could into those 401K and 529 plans to shelter as much as possible. I'd also stop paying on the HELOC right now since there is nothing they can do but harass you between now and your filing, and there are ways to deal with that in the meantime.

Credit cards might be a different matter since they can be ruthless on debt collection and some of the smaller balance holders will be inclined to file suit sooner rather than later. I had three Chase accounts and was sued on my smallest balance. Things seem to be changing in that arena so your mileage may vary.

Definitely stay current on the student loans but paying them off early is probably not what you want to do since they are not dischargeable and may help keep you out of a 13.

Lastly, others may moralize on the vacation issue, but I say go for it. Your kids will only be this age once and the memories you make are much more valuable than the satisfaction of servicing debt. If you've learned your lesson (financially speaking) then consider this your last hurrah before the hard work of rebuilding your financial life begins in earnest.

As for your third question, I guess what I found is that as I progressed through the process, my thinking became less about what a moral and financial failure I was, to accepting a second chance, learning my lesson and teaching my kids to avoid the same fate. It wasn't easy for most of us but the difference in my level of stress, happiness and fulfillment before and after filing was significant.

[chicago513]

Thank you for the response Bob!

On one hand I feel like my financial situation is unsustainable but at the same time I think I could work my way out, I just think starting fresh would be much easier and probably quite a bit quicker too. I wish I never bought the stupid house, it just seemed at the time for someone with a modest income if I didn't jump in and buy then then they would soon be too far out of my price range.

Regarding the credit cards, almost all the CC debt is on one card I did a balance transfer to, mostly from medical bills I was afraid would go to collections. You mention to stop increasing balances but currently I'm not behind on any bills. Is the reason you say to stop increasing CC balances due to the threat of lawsuit or is it something I would run into trouble with during the 341 meeting? I was planning to at least make minimum payments up until bankruptcy filing.

I’m a bit confused as to how paying off the student loan would put me in a chapter 13. Is that because they would say I’m making preferential payments and I would have to pay a portion back?

Also, that is exactly how I feel about the vacation issue. We have taken 1 vacation in the 6 years since we bought our house, and that vacation was a 2 hour drive to camp in tents for a 3-day weekend. Instead of vacations we’ve put money towards the mortgage principal, if I only knew then. Now I feel that if we go through with bankruptcy who knows how long it will be before we can do a vacation.

[AZNoName]

Ditto BobMango!

[BobMango]

Regarding the credit cards, almost all the CC debt is on one card I did a balance transfer to, mostly from medical bills I was afraid would go to collections. You mention to stop increasing balances but currently I'm not behind on any bills. Is the reason you say to stop increasing CC balances due to the threat of lawsuit or is it something I would run into trouble with during the 341 meeting? I was planning to at least make minimum payments up until bankruptcy filing.

I don't think you'll have a problem at the 341 as long as you're not running up the balances to the bitter end. You shouldn't have an issue with lawsuits as long as you plan on filing within about 6-9 months of your last payment and aren't paying some creditors and not others. Nothing gets them moving like seeing you are paying someone else. Lastly, my personal take is if you know you're not going to be able to pay off the debt you shouldn't take it on (or add to it.)

Once you have a filing date in mind I'd stop paying the CCs and maximize taking care of things like retirement and kid's education funds, dental and medical procedures you might need but have been putting off to take care of debt payments, etc. This will really become the point where you are committed to filing. You'll want to read up on how to deal with collectors to reduce the hassle factor, but since it seems to be one card you may not get the kind of constant attention some filers get.

One last point about stopping payments before filing. Some folks seem to think that keeping current until filing makes credit repair/recovery after discharge much easier and that may be true. As for me, it's been just over two years since my discharge and my credit score (from Experian) is pushing 700. I'm getting ready to look at a new VA mortgage so I'm well above the minimum credit score for that. I had tons of lates on a variety of accounts, and a foreclosure on rental property.

I’m a bit confused as to how paying off the student loan would put me in a chapter 13. Is that because they would say I’m making preferential payments and I would have to pay a portion back?

The difference between qualifying for a Ch 7 vs. Ch 13 is not just income and family size, but the totality of circumstances. If you are under the median but well able to service debt it makes it more likely that the trustee will look harder at your qualifications. So if you pay off the student debt that just leaves more disposable income to look at after filing. In reality there is no benefit to accelerating the student debt since you have to pay it one way or another. Why not just stay current on it throughout the process?

[Drazil65]

Hi, I know how you feel about the house thing and we do not plan on purchasing any more houses for a very long time after this is over (I cannot even think about the money we have thrown away, if we only knew ) . You seem like you have done your homework and have a good plan. I agree with the other posters and the only thing I would add is that during your planning stage is to search and then setup Google Voice. You have time to contact all your creditors and update/change you contact phone number to your new GV number once steup. This will make your life so much easier during the default stage. Good luck!