What you need to know before you decide to sell, refinance or file bankruptcy

Have you ever found out your home had a lot of equity? If you’re like me and everyone else in the world, you thought that if you could just refinance and pay off the credit cards, that would fix everything. 

Maybe it would. It might help a ton in fact. But it would depend on how much equity was in your home. How much equity we’re talking about. Let’s say for example that Tarzan and Jane owe $30,000 in credit cards and own a home worth $450,000. They each make $40,000 per year. They have two children, bad credit and their monthly credit card payments add up to $1050 per month.

Upside Down or No Equity

If their house is upside or has no equity, they might just file a Chapter 7 Bankruptcy and be done with the credit card debt. As a married couple with a family of four and eighty thousand per year in income, they would qualify for a chapter 7 bankruptcy in California and wouldn’t lose the house to the Bankruptcy Trustee assigned to administer their bankruptcy case. Bankruptcy Trustees are only interested in equity that they can actually impound, in their case, there is little or no equity at all.

The only risk is that Tarzan and Jane are paying for a house with a loan of over, or equal to $450,000. That’s a big loan with a big payment. They should probably fix up their place as much as possible, do it fast, and sell it to buy a house they can afford. Their payment on $450,000 is probably $2700/mo depending on the Homeowner’s Association Dues and Escrow Impounds and whether they have had the loan modified or not. So, they could file bankruptcy, get out of the credit card debt and if they can budget really well, they might stay in the house or sell it or even short sell it and find a rent that they can better afford.

Small Amount of Equity in the Home

See above but now the short sale is off the table so that at least when they sold, if they did, then they wouldn’t have a bankruptcy plus a short sale on their credit and that’s good for everyone. It also means they have a lower balance on their mortgage and that means maybe they should stay, at least they’re on the positive side and their payment is likely lower than in the first example supra.

Significant Equity in the Home

Of course this is where I wanted to get to in the first place. Now there are some real decisions to be made and not all of them are rosy. Let’s assume there’s $140,000 in equity, so that on the $450,000 house they only owe a mortgage with a balance of $310,000.

At least, at $310,000 in mortgage debt, Tarzan and Jane probably have a mortgage they can afford of something in the neighborhood of $2000 per month depending on impounds and etc. For a family of four, that’s comparable to what rents would probably be if they moved. So they wouldn’t want to move because the equity and the affordable house payment.

So what are the options?

a) Just Keep Paying Your Credit Card Payments

The average monthly credit card payments are probably about $1050 per month or even more if they just continue paying them. It will take a long time to pay them all off if Tarzan and Jane are only paying the minimum monthly payments. In the end they will have paid off nearly $100,000 because of all the interest. So this is not a good plan. 

b) Sell Their Home and Buy Another

This is a terrible option for obvious reasons outlined above, there’s plenty of equity and an affordable payment. Selling in order to pay off credit cards is a terrible idea. Besides where would they go? They would have cash but bad credit and a decent income. That and a couple dollars will get you a cup of coffee but not another house.

c) Chapter 7 Bankruptcy

I like chapter 7 bankruptcy more than chapter 13 in most cases, but not this one. Tarzan and Jane are too young and healthy. Chapter 7 is the Straight Bankruptcy or also called a Liquidation Bankruptcy where you’re in and out again in about four (4) months, however, the Trustee’s job in a Chapter 7 is to collect assets from you, liquidate them and pay them to your creditors. Tarzan and Jane have $140,000 in equity, but in California they can protect only $100,000 in equity in their home at best. Have a look at Calif. Code Civ. Pro. 704.730.

Certainly, if one of them were permanently disabled, on social security, or had a letter from the VA so stating then they would be good to go. In that case they could protect up to $175,000 of home equity in a chapter 7 bankruptcy, in California. (See Link above). Even if no one has stated that they are totally  and permanently disabled or close to it, and if one of them cannot participate in gainful employment, then they should go to the doctor and get one or two of them to sign off on it. Or if either were over sixty-five (65) years old, then that works too, and they could protect up to $175,000 in home equity. 

There’s another option for people over fifty-five (55) and low income, (but that one hardly ever works). If Tarzan and Jane could protect more equity than they actually have, then they could file a chapter 7 bankruptcy and keep the house no problem and since $175,000 is greater than $140,000 in equity, they could file a Chapter 7. Unfortunately . . . 

Turns out that we’ve already decided that Tarzan and Jane have two munchkins still at home. Tarzan and Jane are probably young-ish and they are not disabled since both are working and making $40,000 each. So the disabled protection for home equity is not going to work for them and the low income over fifty-five (55) is not going to work either. So they can protect only $100,000 of the equity or $40,000 less than the equity that they have.

In a Chapter 7 Bankruptcy the Trustee would sell their home and give them a check for $100,000. But where can they move with only $100,000 and bad credit? I think we may have seen this movie before. But with a bankruptcy too?  That’s even worse.

Perhaps one might think that the Trustee couldn’t obtain enough money from the sale of the home to cover the costs of sale, and while it may be close to true, Chapter 7 Trustees have other things up their sleeves. Realtors will sometimes reduce their fees. Even more importantly, sometimes the mortgage lender will take a reduction in pay off as well. Because a bankruptcy trustee does not need to be able to collect very much in order to go through with taking a home and selling it, in this case he or she probably would. It gets even worse. During the time that Tarzan and Jane’s bankruptcy were to be pending, and before the home sale were complete, if the value of the house went up and the bankruptcy trustee could take advantage of it, then the bankruptcy trustee gets the additional appreciation, not Tarzan and Jane.

So if you don’t mind the Chapter 7 Trustee selling your house for you then maybe a Chapter 7 is for you. But I don’t recommend it, not in Tarzan and Jane’s case.

d) Chapter 13 Bankruptcy

A Chapter 13 Bankruptcy gives a type of protection that a chapter 7 does not. Remember that in a Chapter 7 Bankruptcy the Trustee’s job is to take things away, sell them and pay creditors. In a Chapter 13 Bankruptcy, the Trustee takes monthly payments from Tarzan and Jane only. They would get to keep their home.

In this case, it would work like this, the home equity that Tarzan and Jane can protect is $100,000 but the total equity is $140,000 leaving $40,000 not protected. The $40,000 which is not protected is greater than the $30,000 that Tarzan and Jane owe in credit cards, therefore, Tarzan and Jane must pay 100% of that $30,000 in credit cards into the payment plan for up to five (5) years.

At least the payment plan would require little or no interest. It would require a Chapter 13 bankruptcy payment plan payment of about $625 per month in Southern California. This is almost certainly a much better cash flow than just paying the credit cards directly by about half or so. Remember that they were paying $1050 per month on credit card bills before?

It’s not a bad monthly payment really. If you need a Chapter 7 or a Chapter 13 Bankruptcy in Southern California including San Diego, LA, Orange and Riverside Counties, call me 951-200-3613. 

e) Debt Consolidation Plans

There are three main types of debt consolidations: The First is the Chapter 13 Bankruptcy discussed above. The second collects payments  from Tarzan and Jane and negotiates with the credit card companies. They form agreements with creditors to reduce payments by obtaining lower interest rates and on rare occasions also reductions in principal as well. The payment would be about what a Chapter 13 payment would be. 

The third type collects regular payments from Tarzan and Jane but lets their credit cards go unpaid for a while until those debts are sent to collection agencies and then the consolidator settles the debts with the collection agents for a one time payment for less than the full balance. This is also called Settling the Debts or Debt Settlement.

Often they work out great. Other times, not so much. Sometimes what happens is you place your five (5) or ten (10) accounts, including credit cards, small loans, medical bills etc that you owe on the table in front of him, and if he’s been doing debt consolidation work long enough, he must immediately know which ones will play ball with him and which won’t. However, what he won’t do, is tell you which ones won’t work with him. Think about it, if there were one or two that wouldn’t work with him and he told  you, you would call me instead. 

Next thing Tarzan and Jane know, one of their credit cards has sued them. If the attorney who sued them was unscrupulous, as collectors sometimes can be, then Tarzan and Jane might not even know that it has happened until they find out that their wages are being garnished. Wage Garnishments can take up to 25% of a normal paycheck. Or they might find out because their bank account has been emptied by the sheriff via bank levy.

f) Refinance or Second Mortgage or Home Equity Line of Credit

But how do Tarzan and Jane take a loan against their home when they have bad credit? Even if they have enough equity in the house to borrow enough to pay off the $30,000 in credit cards, who will lend to them? 

It’s not a question of WHO but WHEN will they lend to you? Credit Repair is what you need.

Did you know that you can repair your credit yourself? It’s easy too. You just need to know how. If you could raise your credit score enough, then you could refinance your mortgage, obtain a second mortgage or qualify for a home equity line of credit.

A second mortgage would give a much better cash flow than a chapter 13 bankruptcy would by at least half. The second mortgage payment might be only about $325 per month. So, from a payment of about $1050 per month, down to about $325 per month. That’s a huge improvement and all you have to do is follow the Guide and it’s real simple.

Of course, yes, I do get paid a small commission when you buy the guide, and of course, yes, you should buy it. 

So how do you repair your credit? Click Here for the Attorney’s Guide to Credit Repair.. It’s fast, easy and guaranteed by Attorney Robert Shapiro who wrote the Guide. If your credit is bad, you can make it good. If your credit is good, you can make it better. 

You’ve Gone Through Bankruptcy

What Now?

First, take a breath, for a little while, have a cup of cocoa and relax, however, I don’t recommend the ketchup nor the Tobasco.

Afterwards, there’s plenty to do.

Bankruptcy is to credit repair as spiders are to a good nights’ sleep. Bankruptcy is the Credit Reaper. Nevertheless, sometimes bankruptcy is all you can do. You have to be able to pay for rent or mortgage, feed the family put tires on the car and gas in the tank. How can you do that if your wages are being garnished or you find your bank account empty one Saturday morning when you know your check was deposited yesterday?

If you need a bankruptcy, call I can help. Call 9512003613.

On the other hand, two of the easiest things to do to repair your credit or rehabilitate your credit, is to open a secured credit card and/or buy a car.

Don’t buy the car unless you absolutely must and there is no reasonable alternative. If you have to buy a car, the interest rate will be ridiculous. So, if you have the ability to borrow from a relative, or if you have been able to save  since your bankruptcy, or if you can take a small 401k loan to buy a reasonable car, go ahead. Make it reasonable, you don’t need a lot of options, so skip the bells and whistles. Get an AM/FM radio and air conditioning that both work. Stop there because the lower your car payment, the better your credit will be. If you want to buy a house down the road, avoid buying the car on credit if you can.

The next thing that is easy to do, in general, is to get a secured credit card. You go to your bank or a bank and bring in say $500 cash and ask for one. Usually if you’re paying the amount of the credit line you want down, they’ll do a credit-check light, or in other words they might not even do one. At my bank, because I was already banking there, they only checked their own records. I gave them $1000 in cash, and they gave me a card with a $1000 credit line with very few questions. The interest rate will be horrible but keep reading and you’ll see that it doesn’t much matter if you do as outlined below.

So do you buy something and pay it off? No. You can of course and that will help, but is actually not the best strategy when trying to improve your overall credit health. So you now have a credit card with a $500 credit line, what do you do? Save up another $500 first. Then find something you need to buy for $500, such as a new computer or a TV or something. Then don’t pay it all off at once. You’ve got the money saved, so you pay it off 1/3rd at a time.

By doing it 1/3rd at a time, the credit card company will like you. You’ve paid it off quickly so you’re a good risk. But you also had to pay some interest, and that makes you a great risk. Pay it off too fast, means no profit for the credit card company. Pay it off too slow and that means high profits for the credit card company but also high risk and that is not so good for them. They want want profit and high performing contracts in their portfolio because that has a positive impact on the stock price.

In a year, not only will you get your deposit back but they’ll double your credit line or more. And that increase in credit-line is the most important thing that happens to your credit rating. It can’t happen unless your payments are in good standing, so yes those are important too. But you need both to have good credit, exceptional credit means you have good standing in your payment histories, but also high credit lines and low balances.

Note that I said histories. So you want more than one account open and in good standing for at least twelve (12) months after your bankruptcy is over, or in a chapter 13, twelve months after your confirmation of your chapter 13 payment plan. After the Great Recession, many couples each got a secured card and then put each other on each other’s cards. Then each had two (2) cards.