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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 they 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. To
then have to be an expert in other areas that affect their
clients and prospects is just too much.
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.
Bankruptcy & Short Sale
A woman in her 40's living in NY with a home in FL she
owned. 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.
Bankruptcy
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.
Debt Settlement
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.
Loan Modification
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 talking
with a Debt Settlement Company that called 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.
Debt Consolidation
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
the Debt 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 lates and the
bankruptcy 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 decision.
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.
Feel free to call us if you have any questions!
Great credit brings great
opportunity!!
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