In the past year I have had an enormous amount of consumers and professionals (Bankers, CPA's, Realtors, Attorneys, and Wealth Management Companies) asking for clarity about the choices available to people suffering hardships in this economy. Of course thy want the most practical solution for every different situation. Although we deal with many extremely talented and knowledgeable professionals in this constantly changing mortgage and finance economy it is hard for many to keep up with choices available. Staying abreast of the rules and choices within their own industry is a lot of let alone all the other areas that affect their clients and prospects.
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All of these avenues could be a good choice in the right situation but may be a terrible choice and a huge waste of money if all options aren't understood. I will try to veer off from too much detail to keep the confidentiality of each individual.
We heard from a woman in her 40's living in NY with a home she owned in FL. She was not able to get any income from her Florida property for various reasons. She was renting in NY and working 2-3 jobs to cover the costs. Her income was about $38,000.00. Her Florida home was worth 40% less than her mortgage. She owed $50,000.00 in credit card debt and she was in and out of the hospital with various medical problems. She was very emotional (as most are about changing their situation).
We have seen time and time again good people trying to stay above water for way too long. They wind up paying 10's of $1000's more than necessary because they are afraid of the word "BANKRUPTCY". The reason she came to us was to clean up her credit so she could get better interest rates on her credit card debt and maybe refinance her home. Her credit was a mess with many accounts late, charge offs, and collections.
Here were her options: Credit Restoration would cost her over $2,800.00 and if she had a new late in the process (which she would have because she was having trouble paying her bills) her score would drop dramatically and whatever payment she made to us would be money thrown out the window. One new late payment decreases the score anywhere from 50-100 points depending on how high the score is prior to the new late. She can't refinance her mortgage loan since the house was worth much less than her current mortgage and her credit was so bad that the banks would not approve her anyway. She already tried a loan mod and could not get approved.
Debt Consolidation, which is non for profit companies, would have reduced her interest on credit card debt and had her pay the creditors small payments monthly (through them)over a longer period of time. Her $50,000.00 debt would become $65,000.00 with the interest and new length of payment plan to her creditors. It could take 5-10 years to pay off the debt. After finishing the program she would need credit repair which would cost an additional $2,800.00 and take up to a year. Her total cost would be around $67,500.00 and the time factor could be 5-10 years.
Debt Settlement; A company would settle the debt for a reduced amount (usually 40% of debt). This was out of the question since she needed the funds to pay her creditors in one shot and did not have savings. She would have needed about $20,000.00 to $30,000.00 available to pay the credit card debt once it was settled. If she had the lump sum funds she would have had to pay the government taxes on the $20,000.00 - $30,000.00 she saved since it is viewed as income.
Then she would need to clean up her credit which would cost her $2,800.00. So she would be paying in total if she saved $30,000.00 and she went to a typical debt settlement company (they would have charged her 15% of what they saved her): $20k for debt+ $4,500.00 debt settlement company+$8,400.00 to the IRS if she was in a 28% tax bracket. Total paid $32,900.00 + $2,800.00 to clean up credit = $35,700.00 This whole process would probably take 1-2 years.
If she sold the house in a short sale she would be forgiven the amount the Bank lost.
- Mortgage $300,000
- Sold house for $160,000
- Government forgives the tax on the $140,000 income bank forgave on her mortgage
- Goes to bankruptcy and pays $1500-$1800 for Attorney
- Wipes out debt of $50,000 to credit card companies
- Plus one year later we clean up her credit which costs her approximately $2800 and it takes 6-12 months to complete
Her total cost is about $4,500.00 to wipe out $190, 000.00 of debt and start over. It took her 4 more months and cost her another $4,000.00 since she tried to stay afloat and pay her mortgage and credit card debt until she was willing to accept the bankruptcy option. It was the stigma (fallacy) of bankruptcy that stopped her initially. You can get a mortgage about 2 years after bankruptcy or sooner (speak to your mortgage professional). We found out later that she had used the increasing value on her house, before the market crashed, to take a loan of $60k. She really made money on her home.
Another example: an Architect owns a home that has held its value but his mortgage was still almost the value of his home. His salary went from $175,000.00 to $40,000.00 in the last year. He has $85,000.00 in credit card debt and had late payments in the past 8 months. His interest rates with the creditors sky rocketed and they refuse to decrease them. He is struggling to pay the credit card payments and living under incredible stress and fear. He never thought he could go to bankruptcy since he owned a home. He is the only income earner in the family and has 2 little kids in private school. He came to us for advice and we connected him to a bankruptcy Attorney and a possible loan mod as well. This was his best option and he was relieved he didn't have to give up his home.
I spoke with an elderly man whose business just dissolved. He has a home with a small loan and large value. He has savings but his wife was ill with a chronic disease and he was suffering from depression. He owed $40,000.00 in credit card debt and had a 750 credit score. He and his wife were not making any income. After speaking with him for a while I learned that he did not need his credit and was not concerned about his scores reducing. He was not a candidate for Bankruptcy and it made sense for us to negotiate his debt. The creditors would not even speak to us until he was 4 months late and his credit score dropped. It was a tough situation for him and his wife since they were bombarded with harassing phone calls (even after telling their creditors to stop calling them) day and night. They thought it out and we were able to save them about $24,000.00. They were very happy and relieved at the end of the process. It did cost them $2,000.00 for our services and the taxes paid on their savings to the IRS. Remember each situation is different in terms of taxes paid and must be discussed with your CPA.
A professional with a family owning a home upwards of $1,000,000.00 in Long Island. After owning the home for a year he took a loan on the increased value to renovate (about 29 months ago). He has a salary of over $250,000.00 and is the only income earner in his family. He called to ask about Debt Settlement after he had discussed this option with a Debt Settlement Company that had contacted him. He owed over $175,000.00. They most likely found him on a list the credit reporting agencies sold seeking out high debt individuals. He was barely covering his mortgage and having a difficult time paying his credit card debt. His interest rates on the credit card debt were hiked up because his balances were very high if not at the limits. He was told by a Debt Settlement Company that his credit would not be ruined (even though he would have to stop paying his debt) and he would probably not have to pay taxes on his savings.
He would have to put money into a bank account through them until he saved up enough money for the Settlement Company to pay the creditors 40% of what he owed. They would take their fee first and when he had enough savings they would begin to negotiate his debt. Most of this was false. If you don't pay your bills on time you will have late payments on your credit report END OF STORY. He really needed to look into getting a loan modification first since the amount of his mortgage was, most likely, more than his property value. If he had many settled accounts with late payments he may not have qualified for the loan mod. We referred him to an Attorney to discuss his mortgage situation and advised him against debt settlement until he examined the loan mod option first. He also needed to find out what the tax ramification would be if he had $100,000.00+ added to his $250,000.00 income after his credit card debt was settled for less.
A woman earning $100,000.00 with $30,000.00 of credit card debt and very high expenses. Her balances are very close to limits and some over the limits. She wants to pay her creditors but can't handle the high interest rates and increased minimum payment. She owns a condo in Manhattan with a little equity and had a piece of property upstate with a value of $30,000.00. She was denied a loan against her property because of low scores from her very high balances on her revolving credit card debt and although her property was on the market it was not selling. Debt Consolidation may be the best choice for her since her interest rates could be reduced to 6% rather than the 23% she is paying currently. She will pay them a small fee plus a reduced monthly payment which they will deliver to her creditors.
It is important that she knows Consolidation Company may make her reduced monthly payments late or put a mark on her credit profile stating she is in a debt consolidation plan. This mark affects the scores negatively. She can also ask the DC Company to keep this info off her credit profile and to make sure payments are made on time but there is no guarantee this will occur. We have seen the scores drop dramatically because of these marks. The credit can always be cleaned up in the future when she gets a handle on her debt. If she is saving 17% interest on her $30,000.00 and her payments are not drawn out for 10 years it could be a good choice in this situation.
All these examples show the different options available and the struggles we are seeing in this economy. One thing we find again and again is the misconception that a bankruptcy is so much worse for the credit than anything else. If you have excellent credit scores and you have a new late payment the score will drop 70-100 points. If you continue to have more lates the score will drop further. If your score is already very low a bankruptcy will not drop it much lower. Credit scores are driven by what is happening now. As the negative info on the credit report age the score increases. We can also improve the credit a year after bankruptcy. Once your credit scores are low it is pointless to worry about the score if you can't pay your bills and are having trouble with basic necessities.
Credit scores can always be improved. It is sad to see a person struggling to pay credit card debt before feeding themselves. Bankruptcy is there for a reason and can be a great tool in these difficult times. It is important for consumers to seek out information before deciding to move forward. Speaking with a Bankruptcy Attorney, Debt Consolidation Company, Mortgage and Loan Mod expert, a good Realtor for short sale info, and a Credit Restoration firm are very important to make an educated decisions. There are some professions that will not hire a person with a bankruptcy on their record so when seeking info make sure to ask about this possibility and how it relates to your career.
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