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Advice needed

Posted by chennemann (My Page) on
Mon, Feb 2, 09 at 12:38

My short term future is looking bad financially.

Our family income has been reduced by $25-35k/yr.

Debt
$16,000 credit cards
$227,000 on main house (original price 275k) - House value 175k. Foreclosures in the neighborhood $130-150k for similar house. This property is on a 4.5% ARM that will expire at the end of the year. Also we have a second mortgage
$127, 000 on second house - House value 105k. Foreclosures in the neighborhood $60-75k
This property is on a 30 year mortgage and we have a lease-option deal in place(which we lose $200 a month). But the option will not be picked up because of the lowering of the house value.

Assets
30k in 401k
10k in a bond

We are going through our second adoption, so we were expecting to have to go in debt on credit cards. We are looking at another 10-12k in debt for adoption.

My job security is iffy, but should know more in the next 3 months. My income could easily increase 10-20k, if the economy improves in Michigan/Automotive.

In 6 months when we have the new baby, I will not be able to make all the payments.

Plan
Increase income - second job, doing lease option deals, sell stuff, etc...
Decrease expenses - My car payment will be paid off in two months. Bring lunch, don't go out to eat, reduce food cost, no vacation or entertainment expenses, etc...
Transfer debt to lower percentage credit cards. We both have over 720 FICO scores still.
Look into refinancing the house in a couple months. The senate is looking at 4% loans for people in my situation.

Options if the plan is not enough:
Look into purchasing another house while the credit is still good. Online people are calling this buy and bail. I am not willing to lie to get the new loan, so I may not be able to get a loan. We could borrow some to get a bigger down payment, but the most we could get is 10% without making it look like we got a loan. We would then have to go into foreclosure/bankruptcy.

Go into foreclosure, save as much money as possible. Then buy a house under owner financing/lease option. Would still have to claim bankruptcy.

Consider some kind of short sale.

It is not an option not to do the adoption (the child will be from the same mother as the first adoption). Any advise would be greatly appreciated.

Thanks,
Chuck


Follow-Up Postings:

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RE: Advice needed

I think you will get lots of helpful advice on this forum but be prepared for some non-sympathy as you are like so many many individuals and families who ran up credit card debt and chose vacation/investment property over retirement funding and fall-back cash. It sounds like you were riding right on the edge to begin with and then the edge moved. I personally would not count on Detroit recovering any time in this decade.

A couple of baseline questions: how old are you/your wife? Instead of globals, can you provide a monthly expense breakdown, ie mortgage payments, car payments, other 'fixed' expenses such as cell phones, electronic services (cable, internet), an estimate of money spent eating out currently, utility bills, etc. You need to figure out how much cash you can free up.

I suspect/hope that refinancing at 4% fixed will become a widespread option as it is the most straightforward way to keep people in their houses. This may not be possible for second homes. However IF your mortgage payments did not increase, could you find the cash in your projected reduced budget to ride out a few years of lower income while making required payments, and hopefully whittling down that credit card debt?

BTW lots and lots of people are going for those second jobs, don't count on finding one.


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RE: Advice needed

You need to figure out what your financial situation will look like if you refinance your mortgage. Although you owe more than the house is presently worth on the market, I think you can ignore that if you can stay in it, because eventually (5 years?) the market will change and the house will appreciate in value.

What to do with the second house? Can you rent it to someone and use the rental payments to meet expenses?

You should also crunch the numbers for a "worst case" situation -- you can't refinance, you lose your job, etc. Then sit back for a while and let that sink in before you decide what to do.


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RE: Advice needed

Our second home was my wife house before we were married. We had it leased out under a rent to own situation. It did not work out and the value has continued to go down. We have great tenants in their now, but the price of the house is upside down. We are losing around $200 a month. With the tax benefits and the fact we are paying down the mortgage, this is not to bad.

As of last year we had basically zero debt on the credit cards. The credit card debt is from adoption and my wives school (which use to be paid by her company, she is in her last semester). I lost my job and a large part of my income is commission based, so that is why we are making so much less now with the new job. We are pretty frugal and have never had any issues ever.... I am not asking for sympathy.

BTW I am 39 years old.

If we can refinance at 4% we will be ok, assuming we both keep our jobs.

Thanks for any suggestions,
Chuck


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RE: Advice needed

Given that few among us are financial experts, our advice may vary. But here are my thoughts:

- Write down your expenses. That may help identify areas to cut that you may not think about: high-speed Internet access (drop down to dial-up?), memberships you don't use, etc.
- Examine your home/auto insurance. Is there any insurance you're paying for that you can reduce or drop outright? Talk with your insurers to make sure you're getting the coverage you need (remember, it's insurance against catastrophe, not a budget-management plan) and if there are any discounts for which you qualify (for example, my car insurance gives me a discount because my car has an anti-theft device). Consider upping your deductibles to lower your premiums, but also consider that, if you do need to claim on your insurance, a higher deductible could cost you hundreds more than you may have on hand.
- Are there any life-insurance cash values? Can you borrow against your 401(k) rather than liquidate it? At 39, you're going to get hit hard with penalties if you close that 401(k).
- Beware of how much you can do with refinances, credit-card transfers, etc. You don't want to do things which will ding your credit, because that will make it more expensive to borrow later.
- I would, however, call your credit card companies and tell them you're thinking of moving to another card and if there's anything they can do about your current APR.
- You mention your wife's schooling being reimbursed by her company, in the past tense. Is there an expense her work will pay for that just hasn't been reimbursed yet? Or have they just yanked the benefit?
- Do you have a second car/boat/trailer you can sell?

Sharpen that pencil! And best of luck.


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RE: Advice needed

Chuck,
A) your 4.5% ARM is likely to adjust downward at its reset,
B) shortterm rates are likely to stay low plenty longtime going forward,
C) note modifications are likely available on your primary, and possible on your rental,
D) All the above can make your lease/option business blossom into functionality...

You are not "at the end of options."

ALTERNATIVELY;
You don't have enough cash to bring to the table in order to refinance any of the homes. Any refi will be against the CURRENT value, not some past historical value... so in order to get down to the LTV level you may qualify for you'd have to pay down a huge amount of the previous balance at closing.

Further, if you go to shortsale on the mortgaged homes, the universal default clauses in your revolving credit cards will likely kick your low rated accounts up to the sky... dismal, but a reality to anticipate.

You're unfortunate in your geographical location... and yet (given you've learned about lease-option methods) you are equally blessed in opportunity in the Michigan region, where the numbers really work for that strategy.

I believe it appears that the best strategy you might be facing is to prepare for a 5-7 year "institutional credit vacation" (meaning you accept that you won't have much traditional institutional credit options for that long,) and then navigate your exit from your overleveraged properties via shortsale.

Your qualified accounts are skinny enough its very unlikely any lien-releasing banks would insist on tapping them, nor insist on your carrying back a payment plan on unsecured default balances... so I don't see much risk in this for you at all (short of giving up the chances at traditional institutional leverage for a spell.)

This is not a "moral" conversation... but one of market realities for where you are in the country, specifically.

Luck!
Dave Donhoff
Leverage Planner


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RE: Advice needed

Another item: The income limit for eligibility for S-CHIP (state children's health insurance plan) is going up to $60,000/year. It may already have adjusted. Is health insurance for your children (I use the plural as one is on the way) a major expense now? Are you at risk to lose employer-funded insurance for family members? If so, you might look at the "monthly net" on staying below the CHIP income limit, as purchasing an individual family health policy (especially with small children) could be catastrophically expensive. Even COBRA is expensive.

Right now it sounds like there are options for you to keep all boats floating or at least to make a good recovery. One serious childhood illness during an interval when you lack health insurance could wreck all your plans. Hospitals have bounty-hunter bill chasers these days. You might want to learn a little about S-CHIP, like how often you have to requalify, since your income is volatile. Just something to keep in mind.

PS I'm sorry my first post sounded kind of snotty; I have read other threads where people have posted in similar circumstances, but got there through foolish spending...I am thinking of one in particular where a woman sold stuff on eBay to buy Christmas presents and spent $3000 on presents, when they were behind on their mortgage. She thought she was doing "good" but the respondents generally did not. You were caught out by the economic collapse, as your second post makes clear. Best of luck and I hope you don't need CHIP, but don't forget it's out there.


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RE: Advice needed

You've had some good advice given here & had also come up with a good plan yourself for reducing expenses. Make sure to check into the tax education credits avail. Here's a link to the IRS pub: http://www.irs.gov/publications/p970/index.html.

Also, remember that if you're paying PMI on either home, it's now tax deductible.

You didn't mention what you're doing for health ins. If your income is low enough now, you may be able to get Medicaid for the children. I don't recommend that you & your wife go without. Medical expenses for a single event could bring on disaster. If you don't have coverage now, look into high-deductible plans. COBRA is generally more expensive than plans you can buy yourself.

Check your tax withholding allowances. If your income has dropped that much & you haven't changed the withholding allowances, you may be able to get a little extra each month that way.

Check your cell phone bills & contracts. Can you lower those?


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RE: Advice needed

Just a thought, it was mentioned to check cash value against life policies - before cashing them out, buy term life insurance it is much cheaper. It is important to have insurance when you buy new insurance to save having health exams.


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