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 Post subject: Feedback Requested on Plan to Relieve Credit Debt w/Equity
PostPosted: Mon Apr 30, 2012 7:55 pm 

Joined: Mon Apr 30, 2012 7:43 pm
Posts: 9
Hi everyone. Long time reader, first time poster here. Through the help of this blog and through learning from family mistakes while growing up, I've managed to maintain somewhat fiscally fit. Today I am asking about my father's situation.

Background

He is on disability, collecting a bit over $2K in pensions and disability / social security. He owns a house with a $50K mortgage remaining and valued around $160K. Monthly expenses tend to be around $1K-$1200. Unfortunately, through emotional stresses (e.g. depression), he fell into an impulse-buy spiral leading to around $25K of credit card debt.

This is the second occasion of heavy credit debt. Originally he owned the house outright, but through credit debt (impulse buys, arg!), he had to open that first mortgage to pay them off in Spring 2010.

Now he is in the same situation again, but this time it's a bit more difficult to find a willing lender for a second mortgage. Fortunately, for the time being, he is now more cooperative with me assisting with a restricted budgeting plan.

Question One: Thoughts on My Plan

I recommended that he search as much as possible for a 2nd mortgage and take out $35K. $25K pays off the high-interest credit debt. $5K goes to an upcoming hip surgery. And $5K for other miscellaneous expected upcoming medical bills. From there, I recommended he close or freeze all credit cards to prevent from another incident. And also allow me to work with him in freezing his credit report so that he can't open new cards due to impulsive behavior. From there, his monthly income covers expenses and we can get back on track, provided he can change his habits with a budget I lay out for him. All at a loss of ~$200/month for 2nd mortgage payments and a loss of $35K in equity.

Thoughts?


Question Two: Worst-Case Scenario?

In a worst-case situation where he just can't find a 2nd mortgage, would bankruptcy be an option? Because his equity is greater than the debt, I wasn't sure how this works. It sounds like a Chapter 13 situation. But I'm very unfamiliar with bankruptcy and would probably recommend he goes with me to a bankruptcy lawyer.


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 Post subject: Re: Feedback Requested on Plan to Relieve Credit Debt w/Equi
PostPosted: Mon Apr 30, 2012 8:28 pm 

Joined: Mon Nov 01, 2010 5:15 pm
Posts: 1152
Anytime you take out a mortgage to pay off credit cards, it's the worst mistake you can make. You're turning unsecured debt into secured debt.

Confiscate the cards, put him on a strict budget, & find another way to pay them off. Putting him another $35k in debt on top of the existing $50k from a zero mortgage at his age is a disaster.

Try getting him a zero interest card & transfer all the cards to it. Then hit the gas on paying them off.


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 Post subject: Re: Feedback Requested on Plan to Relieve Credit Debt w/Equi
PostPosted: Tue May 01, 2012 4:05 am 

Joined: Mon Apr 30, 2012 7:43 pm
Posts: 9
Thank you for the tips and considerations.

With his credit being so so poor, I'm unfortunately not confident he can get a $35K zero-interest card to cover credit card costs and upcoming surgeries / medical expenses. Looking at a recent credit report, he hasn't been able to get anything more than $1K store credit cards.

I considered opening a zero-interest card, taking on the debt, and allowing him to pay it off to me. But (a) I am coming up with some life changes that don't allow me that credit flexibility, and (b) I am [selfishly] uncomfortable taking on that amount of debt after seeing what it's done to my family.

All his current cards are maxed out, and high interest. So I didn't see any options for a transfer to an existing card. And his current credit card payments put him over his total income. The 2nd mortgage, while painful as a fixed, secured debt for the rest of his life, I figured at least was a way of debt consolidation.

Do such zero-interest cards exist for one with such poor credit? Or alternatively have folks had good experience consolidating into a credit counseling agency? (Many of them seem so questionable)


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 Post subject: Re: Feedback Requested on Plan to Relieve Credit Debt w/Equi
PostPosted: Tue May 01, 2012 6:34 am 

Joined: Mon Nov 01, 2010 5:15 pm
Posts: 1152
Quote:
I am [selfishly] uncomfortable taking on that amount of debt after seeing what it's done to my family.

Don't blame you a bit. Family are the worst. They'll drag you down with them given the opportunity.

Quote:
Do such zero-interest cards exist for one with such poor credit?

Probably not. I don't know of any. You didn't say how old he was but have you considered some sort of an intervention? Confiscating the bank accounts & credit cards? Obviously, when he's left alone he makes the wrong choices with his money.

Quote:
Or alternatively have folks had good experience consolidating into a credit counseling agency? (Many of them seem so questionable)

Good question. Most of the "questionable" ones are not credit counselors. They're schysters masquerading as credit counselors or debt management companies. They'll make a bunch of promises & take their "fee" of your monthly payments upfront. It's best to avoid them.

The only one I have heard good things about is the NFCC. You might try them. If your father hasn't stop digging a financial hole then it won't matter who you use.


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 Post subject: Re: Feedback Requested on Plan to Relieve Credit Debt w/Equi
PostPosted: Tue May 01, 2012 6:39 am 
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Joined: Wed Sep 23, 2009 9:01 am
Posts: 5358
The solution to a debt problem is not more debt. If he were a heroin addict would you be looking for ways to plant poppies around his garden?

As TW said, credit card debt is short term, unsecured debt. Rolling it into a mortgage converts it to long term secured debt. Doing that is one of the poorest decisions one can make!

I suggest you post a monthly budget and we can help you figure out how to pay off the debt.

The problem as I see it is that you are trying to eliminate the pain. If he does not experience the pain of his past bad behavior he will repeat it. TW mentions counseling. That is not a bad idea. But since the underlying problem is depression I think he needs mental health counseling rather than credit counseling.


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 Post subject: Re: Feedback Requested on Plan to Relieve Credit Debt w/Equi
PostPosted: Tue May 01, 2012 7:04 am 

Joined: Fri Feb 10, 2012 6:14 am
Posts: 49
I'll let others address the finances and just encourage you to lovingly urge your dad to get the treatment he needs for his mental health. Spending sprees typically come with mania (bipolar disorder) not unipolar depression. But either way, the problem is just going to happen again if he doesn't have ongoing treatment - medication, counseling, support groups, a day program if needed.

-your friendly clinical social worker.


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 Post subject: Re: Feedback Requested on Plan to Relieve Credit Debt w/Equi
PostPosted: Tue May 01, 2012 9:54 am 

Joined: Thu Jun 23, 2011 3:24 pm
Posts: 87
I agree with other posters, a new home loan to payoff the credit card balances seems like a bad idea here.

Has your father said he wants to change? If not, there may be little that you can do other than be emotionally supportive. And depending on whether he acknowledges his depression, even that may be tricky. Definitely agree with tackling the mental health issue first, *if* he is willing. If he is struggling with his mental health, it will be very difficult for him to stabilize his financial behavior.

Is your father interested in moving in with family? Selling his house and cutting up the credit cards could be an option...*if* the mental health issues can be addressed.

On bankruptcy, sounds like there are a many options before then - including seeking to arrange payment plans with the credit card issuers or selling the house. Treatment of equity in a home varies greatly depending what state he resides in. There is also a federal bankruptcy code (separate from state codes) that has yet another set of rules for home equity. A lawyer or legal aid is your best bet, but some internet browsing may get you some info on the codes in his state.

Good luck!


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 Post subject: Re: Feedback Requested on Plan to Relieve Credit Debt w/Equi
PostPosted: Tue May 01, 2012 7:56 pm 

Joined: Mon Apr 30, 2012 7:43 pm
Posts: 9
Hi everyone. Thank you again for all the great feedback. For those interested, here's some more details:

- He is in his mid fifties.
- He is being treated for depression, both clinically and with medicine.
- No real option to move in with family. Family is very small and all locations are saturated.
- He came to me expressing interest in getting better with financial responsibility, feeling he hit rock bottom. (But since it's happened before, I'm skeptical but as supportive as possible)

He disclosed all his finances to me this evening which I did some crunching on. Given no credit debt, his monthly income is $400 over expenses. There's room to improve on ~$400 of those expenses: cable/internet/phone bill at a whopping rate ($200+) and cigarettes (yuck!).

Now with credit debt, minimum payments run about $900 a month, with most cards being in the 20-25%. As it stands, to be able to pay them down with minimum payments, he would need to completely cut out all unnecessary expenses (which again, I'm skeptical on). And of course minimum payments would take a few decades to pay down fully. :)

So I think my next steps are to do some more research into paying down unsecured debt on an extremely restricted budget, along with looking into debt consolodation options. Nothing else is coming to me right now since bankruptcy seems to be overkill and that 2nd mortgage is clearly a bad idea now that you all described it.


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 Post subject: Re: Feedback Requested on Plan to Relieve Credit Debt w/Equi
PostPosted: Tue May 01, 2012 8:40 pm 

Joined: Mon Nov 01, 2010 5:15 pm
Posts: 1152
I suspect that a restrictive budget would only push him over the edge again. And it would be wash, rinse, repeat on the credit card debt.


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 Post subject: Re: Feedback Requested on Plan to Relieve Credit Debt w/Equi
PostPosted: Wed May 02, 2012 4:30 am 

Joined: Mon Apr 30, 2012 7:43 pm
Posts: 9
Tightwad wrote:
I suspect that a restrictive budget would only push him over the edge again. And it would be wash, rinse, repeat on the credit card debt.


hmm that's tricky. With current living situation all roads lead to a restrictive budget.
Sounds like a catch 22 then ....
Debt reduction = restrictive budget
Restrictive budget = more impulsive behavior
More impulsive behavior = more debt

Changing impulsive behavior even unrestricted seems to have not been successful due to other reasons (i.e. Depression).

I suppose another alternative is to sell the home to get around $90k equity, move into a low rent apartment and hope to live off that $90k + pension + disability for the rest of his life.


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 Post subject: Re: Feedback Requested on Plan to Relieve Credit Debt w/Equi
PostPosted: Wed May 02, 2012 4:57 am 

Joined: Tue Mar 11, 2008 12:19 pm
Posts: 1721
Location: Ottawa, Canada
If he's only in his mid-50's, why doesn't he get a job? What's the nature of his "disability," and what's the prognosis for improvement/healing? Surely there's something he can do to earn at least a bit of an income, isn't there?


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 Post subject: Re: Feedback Requested on Plan to Relieve Credit Debt w/Equi
PostPosted: Wed May 02, 2012 5:23 am 

Joined: Mon Apr 30, 2012 7:43 pm
Posts: 9
Chronic back neck and knee damage due to 30 years of manual labor. This included two failed surgeries. damage incurred no longer allows him to work in any field he wss skilled in. The jobs he was qualified for did not offset benefits of disability and pension. But that's not in any way related to the topic kombat. Would you like a life biography as well or would you like to keep to the topic of finances?

I see where this thread is headed. From a strictly financial discussion (with great feedback) to more personal off topic posts and I suspect soon to be blames or attacks. since it's turning this way, I'll step down from this conversation.

Again for those that provided constructive criticism, I can't thank you enough.


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 Post subject: Re: Feedback Requested on Plan to Relieve Credit Debt w/Equi
PostPosted: Wed May 02, 2012 5:57 am 
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Joined: Wed Sep 23, 2009 9:01 am
Posts: 5358
plarser48 wrote:
I see where this thread is headed. From a strictly financial discussion (with great feedback) to more personal off topic posts and I suspect soon to be blames or attacks. since it's turning this way, I'll step down from this conversation.


We are trying to help you.

I don't think you should dismiss Kombat's question as off-topic. Your father has a cash flow problem. Asking why he doesn't get a job is perfectly appropriate.

Your answer, that he has wrecked his body through 30 years of hard work is a perfectly good explanation of why he can't.

What about the possibility of training for a new career that is less physically demanding?

I'm not a doctor but...I suspect if I were not able to do any work I'd be depressed too! Maybe helping him retrain and find meaningful work will help his financial situation. If that is truly not an option then we can drop it. But I think it is something you should explore.


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 Post subject: Re: Feedback Requested on Plan to Relieve Credit Debt w/Equi
PostPosted: Wed May 02, 2012 6:49 am 

Joined: Tue Mar 11, 2008 12:19 pm
Posts: 1721
Location: Ottawa, Canada
plarser48, I didn't mean any offense, I was merely asking for clarification. I'm sure you understand that there are plenty of cases of fraud and abuse out there regarding taking advantage of the disability system, I was simply asking if it's possible that your father's situation may be partially due to such an attitude, or if he is legitimately injured. Obviously, he suffers from significant physical impediments, so there's no need to get defensive. We're just examing all the options and possibilities to try and help. A little more income would go a long way toward helping him out of his mess. That's clearly not possible, so now we know any further suggestions must remain within the constraints of the income budget you already outlined.


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 Post subject: Re: Feedback Requested on Plan to Relieve Credit Debt w/Equi
PostPosted: Wed May 02, 2012 9:14 am 

Joined: Mon Nov 01, 2010 5:15 pm
Posts: 1152
Quote:
I suspect if I were not able to do any work I'd be depressed too!

Bingo.

Quote:
plarser48, I didn't mean any offense, I was merely asking for clarification. I'm sure you understand that there are plenty of cases of fraud and abuse out there regarding taking advantage of the disability system, I was simply asking if it's possible that your father's situation may be partially due to such an attitude, or if he is legitimately injured. Obviously, he suffers from significant physical impediments, so there's no need to get defensive. We're just examing all the options and possibilities to try and help. A little more income would go a long way toward helping him out of his mess. That's clearly not possible, so now we know any further suggestions must remain within the constraints of the income budget you already outlined.

I doubt there's outright fraud involved. I know people who fall into this category Kombat is describing. They find that collecting disability, social security, early retirement pensions, etc is easier than working for whatever reason. That's not to say they're necessarily lazy, they just don't have the mindset of trying a different career path or vocation so they get on the Gov't tit as a path of least resistance. Then, as DH pointed out, the depression & bi-polar kicks in & they try to make themselves feel better by spending money they don't have. This seems to me to be part of Dad's problem. We can make financial suggestions all day long but if the underlying problem isn't dealt with then it won't matter.


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