Bankruptcy vs. Consolidation

[calamityjenn]

Hi all... Here's my situation. ~$65k in credit card debt and net about $26k a year. The debt was accrued by sheer stupidity. Alot of little, frivolous purchases early on, usage down considerably in the last year (and stopped outright since coming to the conclusion that I was in trouble about a month ago). I'm treading water, making payments as high as I can each month, large payments, but once my half of the bills are paid, I'm not getting much more in than the minimum, which leaves me just barely chipping away after the interest.

I co-own a home with my boyfriend (in a non-commonlaw state), and I'm considering a second mortage as an alternative to bankruptcy, but I'm terrified that if he or I get sick/laid off/etc., that we'll lose our home. In a best case scenario, I could pay it off in 7 years or less instead of the 15 cited on the loan, but even that's a long time to gamble on nothing going wrong.

I want this to be as little burden on him as possible. He has said he'll go along with the loan, but he doesn't seem happy about the prospect, and I'm not entirely either. The house was a -joint- venture, but this is a hole I dug myself, and I want to (finally) take responsibility and get out of it by myself as much as possible, no matter how supportive he is. I feel sick and ashamed on a daily basis about the mess I've put myself in -- a mess I could have avoided by being smart about my finances instead of self-medicating my other woes with a shopping addiction.

While he was helping me research a solution, he brought up the idea of Chapter 13, since I owe so much more than I make and could reasonbly pay off. I met with an attorney, but... I don't know. I worry there too. I want to start saving and planning for the future. I'm due for a raise soon, I've just started working the odd contracting job and hope to do more. I want to start building a future for myself, and putting that -completely- on hold for the next five years is scary too.

Any thoughts? Anyone been in this situation and opted for bankruptcy over the loan?

Thanks in advance.. It's been such a help reading all of the supportive advice you've given each other in other threads. It helps just knowing people have gone through the same things and can still come out smiling.

[keepmine]

Never and I mean never talke unsecured debt like credit cards and make it secured by taking out a HELOC or 2nd mortgage.
Why did the lawyer recommend a 13?

[calamityjenn]

May I ask why, on the avoidance of a secured loan? This is all new to me, and I've seen it mentioned as a viable solution by a number of sources.

Sorry for the confusion above, it was my bf, not the lawyer, that suggested looking into Ch. 13.

(and another n00b question.. what's a HELOC? feel free to just link me to another thread if it's something I missed in reading through...)

[keepmine]

You may well be able to exempt the equity in your home in a Chapter 7 bk. If you use that equity to pay debts that would be discharged in bk, you really screwed up badly.
HELOC is Home Equity Line of Credit.
Stop listening to your bf and get yourself to a bk attorney. If at all possible, you want to file a Chapter 7 and totally discharge ALL of the cc debt.

[calamityjenn]

He mentioned Ch. 7 to me too, but I feel like, with a steady job, and with no extenuating circumstances (I knowingly made purchases I couldn't afford, there is no excuse), I feel like I ought to repay my debts, whether through Ch. 13 or through some sort of debt consolidation and repayment.

I haven't discounted either of them as options, but are they really my only ones?

[SinkingFast]

May I ask why, on the avoidance of a secured loan? This is all new to me, and I've seen it mentioned as a viable solution by a number of sources.

Sorry for the confusion above, it was my bf, not the lawyer, that suggested looking into Ch. 13.

(and another n00b question.. what's a HELOC? feel free to just link me to another thread if it's something I missed in reading through...)

I can answer that one!!

You could be here again in a few years. Just like us.

We refi'd several years ago with a rediculously inflated appraisal, traditional 80/20 first and a HELOC up to 100% of the inflated appraisal value. All to pay off CC debt we'd accrued. Guess what??!! By paying off all our CC's we got outrageous new lines of credit. With higher house payments, we used the CC's for more and more life expenses. Now we're talking groceries, gasoline, medical bills, insurance premiums, etc.

And,........ Taahhhh Daahhhhh!!!

Here we are, AGAIN!!

[StaciMM]

If you don't make your house or 2nd mortgage payment, you can lose your home. If you don't make a credit card payment, that does not happen. That is one reason why you don't want to trade in credit debt for home debt.

[BassBoy]

HELOC bit us in the rear end as well. We did it a few years ago, but it was intererst only, and at the time, we were only making the minimum payment, and getting nowhere. Taking unsecured debt and making it secured with a HELOC is not a good idea.

"I co-own a home with my boyfriend (in a non-commonlaw state), and I'm considering a second mortage as an alternative to bankruptcy, but I'm terrified that if he or I get sick/laid off/etc., that we'll lose our home. In a best case scenario, I could pay it off in 7 years or less instead of the 15 cited on the loan, but even that's a long time to gamble on nothing going wrong."

This is just a thought, but it may be a way to protect yourself, but does your lender offer Credit Insurance? This is a policy that can make your payments in the event that you or your BF become unemployed, sick and/or disabled. I had this with my mortgage, and when I was out of work for a month after an operation, I was glad I didn't have to worry about the mortgage payment.

[keepmine]

I feel like I ought to repay my debts, whether through Ch. 13 or through some sort of debt consolidation and repayment.

IMO, bk is not about ethics or morality but, it's strictly a business decision. If it takes you years and years to pay this off, that's years that you'll not be saving for retirement or saving for emergencies, postponing plans for a family and larger house,etc.
As you age a little, you'll discover that the only person on this planet that really has your best interest at heart 24/7 is-well, you. You better stop worrying about monolithic financial institutions that will be in business a 100 years after you're dead and gone and start worrying about yourself.
At the end of the day, do what ya gotta do. Just be sure you get all of your options explained to you including the Chapter 7.

[SinkingFast]

HELOC bit us in the rear end as well. We did it a few years ago, but it was intererst only, and at the time, we were only making the minimum payment, and getting nowhere. Taking unsecured debt and making it secured with a HELOC is not a good idea.

That was the way our HELOC was structured too BassBoy. Minimum payments were interest only. If I recall correctly, we didn't even have to make payments the first 3 month of the loan, but I sent them in any way. For the first year or so, I always added extra to the required minimum so we'd at least make some dent in the principal. Then it got to where I just rounded up a bit, so we were still paying more than required minimum. We didn't amortize much on that loan. When we paid it off last spring, we paid back almost the same amount we'd borrowed after years of paying on it too.

Oh, and it was a 15 year loan. First 10 years were set up as interest only payments required. Last 5 years, the payments would have been fixed to pay the loan in full at the end of the term. I can't even begin to imagine what the payments woulda been in the last 5 years.

If you have tons of equity in your home and you're looking to borrow a small amount, a HELOC or a second may not be such a bad idea. If you are gonna max out your existing equity with a HELOC or a second to pay off unsecured debt, don't do it. You have no wiggle room if you have to sell quick to get out and move on with your life. Or, you could owe so much, you'd have to over price the house for your market, making it hard to sell.

[BassBoy]

If you have tons of equity in your home and you're looking to borrow a small amount, a HELOC or a second may not be such a bad idea. If you are gonna max out your existing equity with a HELOC or a second to pay off unsecured debt, don't do it. You have no wiggle room if you have to sell quick to get out and move on with your life. Or, you could owe so much, you'd have to over price the house for your market, making it hard to sell.

CalamityJenn, you have a lot of CC debt, and SinkingFast said it well. You would probably end up maxing out all of your equity and this is what I meant by it coming back to bite you on the a$$. So, considering your high CC debt, a HELOC is probably not a good idea.

[jane taylor]

A resounding "AMEN!!!!" on not going the HELOC route! We did that three times "trying" to pay off our debts. We even cashed in all of our retirement to pay off debts. BK is a business decision although it is hard emotionally. Please get a good attorney. Hang in there and keep me posted.

[edwards2]

We did the same thing...paid off our credit card debts and here we are too. Although our Bk was not credit card driven we still had credit card debt. I would definitely avoid it if you can. And by the way dont be embarrassed -we all share a comradarie namely; BK. This is the one place you can go and not be judged. We are all here to support you.

[calamityjenn]

Thanks so much for the advice and support, guys! I've said it once, and I'll probably say it again.. this board (and the people on it) is a real life saver.

Coming into this, my main worry with this particular option was the chance of losing my job or something and being unable to make the payments. But it sounds like, in reading your replies, that the main concern with the HELOC is that debt continues to accrue on top of it. Wouldn't cancelling the cards (my choice even if I win a million dollars in the lottery tomorrow.. I'm done with those things!) prevent that from happening? My monthly bills are actually pretty manageable the way my bf and I split them (he makes considerably more than I do, so he takes the mortgage, while I take all of the other bills), and the required output of funds would actually be lower, making it easier to actually pay for things with real money as issues arose. The minimum payments would be something like $550, if I remember correctly, vs. the $1400 I'm currently putting out in credit card payments (except at an 8% interest rate instead of just under 20%). So if I paid even $1100 a month, and put the rest into savings for emergencies, I'd still be halving the amount of payoff time. Or that was my reasoning going into it, at least.

I definitely hear you on the dangers of taking an unsecured loan and making it secured. No matter which way you slice it, this is an impossibly hard decision.

Are there any other consolidation methods that aren't HELOCs?

And I probably know the answer to this, but do credit cards ever lower their interest rates voluntarily? If I explained the situation and said, "hey, it's this or bankruptcy," or "it's this, or I'm paying it off with another loan tomorrow," would they say "hey, I can't give you 8%, but I can give you 10." or something? And would that hurt my case if I did eventually file for bankruptcy, or would that help it, indicating that I really made a good-faith effort to pay them back that just didn't pan out?

[SinkingFast]

If you get a traditional, conventional 2nd, you'll have fixed payments, with a fixed interest rate, and a fixed pay-off time. That pay-off can be as little as 5 years, but usually goes 10 years.

That's why HELOC's are so attractive. You can go 15 years with those. The first 10 years, the billed payments are interest only.

The problem you get into, with either a 2nd or a HELOC, is using CC's while paying off the debt. Unless you cut those cards up, and write letters to Creditors closing those accounts, you'll use the CC's.

This will come up. That will come up. You'll need auto insurance payment money you haven't been able to set aside because <<insert reason here>>. Your tax bill will come due and you don't have the money because <<insert reason here>>. Somebody always needing something. Sick kids. Orthodontia. Several somebodies have accidents after hours that force us to go the Emergency Room. Car repairs. The heat pump needed repairs. The air handler needed repairs. The heat pump went and had to be replaced. We had to put on a new roof. You name it.

That's the risk, BECAUSE, you simply cannot predict the future.

You can get CC's to lower their rates. Not by threatening BK. But by playing one against another. Tell Chase that BOA has offered you X% interest UNTIL the amount has been paid off to do a balance transfer. Tell Chase to match it or your going to move your entire balance over to BOA. That's happened for us in the past. We made a big balance transfer to get a better rate and the CC company called us. Wanted to know why we'd moved our balance $$'s. When we told them we'd got a better deal, the other CC offered to match it, and often bettered it. Better rate, better terms, until the balance was paid in full type of thing. They will haggle if they think another Bank is gonna be getting your biz.