Erase Debt Now. (Lose Your House Later.)

[UpInArms]

http://www.theledger.com/apps/pbcs.dll/article?AID=/20041010/ZNYT01/410100424/1001/BUSINESS

MICHAEL A. KNOX thought he had run out of ways to pay off his credit card bills when he got the salesman's call two years ago. To wipe out his nearly $20,000 debt, he was told, all he had to do was take out a new, bigger mortgage on his house.

Mr. Knox, then 60 and on disability, signed up. The mortgage broker sent him eight checks already made out to his creditors, and Mr. Knox dashed to the post office the day they arrived to mail them.

But the bigger house payment devoured 75 percent of his income. He quickly fell behind. And the full meaning of what he had done suddenly became clear.

By using his mortgage to pay off his credit card debt, Mr. Knox had avoided the humiliation of filing for bankruptcy. But he had put at risk something much more important to him than his pride. In late January, with Mr. Knox in arrears, the Wall Street firm that had bought his mortgage informed him that it was taking away his home.

<snip>

Encouraged by low interest rates and rising home values, millions of Americans have been using their homes to pay off credit card bills. One-fourth of homeowners who refinanced their mortgages took out larger loans on their homes in order to pay off credit cards and other debts, according to a recent study by the Federal Reserve.

...more...

[elehhhhna]

1. they'd be better off filing bankruptcy and keeping their equity & ....

retirement plan accounts.

Much better off.

[mahina]

2. My banker is pitching a plan to pay off the house

by taking out another loan and making big payments against the original mortgage. I don't understand how two loans make less debt than one loan- he says it's because of the way amortization schedules work. I'm not a financial whiz but this doesn't make any sense to me.

[madaboutharry]

3. What does he get out of it?

So much of this is simply selling a product. In order to speed up paying off a house, make an extra payment a year. Or take the principle and divide it by 12 and send that extra amount marked for principle only each month. It can speed up paying off a house somewhere between 10 and 12 years. These compamies are pitching schemes for their own benefit, not yours.

[Katherine2]

4. If it doesn't make any senses

to you, DON'T DO IT.

[jdj]

18. "I'm not a financial whiz"

they're banking on that.

[doni_georgia]

42. Recommended reading

I know most people would throw up on their shoes at the thought, but if you're short of knowledge, try "Eat the Rich" by PJ O'Rourke. I disagree heavily with the man's politics, but he's not without value and is laugh-out-loud funny at times, even for a Dem like me. "Eat the Rich" is a good book on economics for someone who isn't good at grasping some of the basic concepts and how they apply in life on a grand as well as small scale. Beneath the reactionary twaddle is actually some very sound information.

Mac in Ga

[drb]

36. That's a crock...

You're paying interest on two loans at the same time! The only winner is him.

[Yavin4]

5. The Best Way To Pay Off Your Debt and Avoid Bankruptcy

Is to work out a repayment plan with your creditors on your own. You shouldn't take out more debt to pay off other debt. That's just going to put you into a bigger hole. Now, if your creditors don't want to work out a new repayment plan, then you file for bankrutpcy.

[doni_georgia]

39. And along with that, try this

Make minimum on all bills, except for one or two, and pay those down as fast as possible. It's best if you pick the smallest ones first. Then after the first couple are gone, take the next two and drill them down by rolling the payments from the first two into the next two. Keep going, one or two at a time until you're down to your mortgage, and THEN refi, while we still can (I suspect mortgage rates are going to go up in a hurry if * gets back in and may go up substantially anyway). This will add points to your credit score as well as putting you in an advantageous position financially.
Don't take on any new debt unless it is unavoidable (the refrigerator just died and you have to replace it, and such). It's a more painful solution than an equity loan and it takes longer - might take a couple of years - but it works far better and you'll like yourself more for having done it.
And when you finally can get a real refinance arrangement, consider whether you want a 30-year or 15-year mortgage. A 15-year is probably a better idea at this point - go for a 10 year if you can. I have a very, very bad feeling that the period between 2012 and 2020 is going to be extremely difficult financially, especially for stock investors. A lot of the retiring boomers are going to be converting their stock and the market may be glutted, especially since there are a number of people out there like myself who won't touch stocks under the current real-time system. I think the market is more ripe for abuse than at any time since the Great Depression, and that there will eventually be a major correction.
Finally - be realistic. Do NOT trust appraised value as a guid for your home's true loan value. A thing is worth only what people will pay for it. If your home is assessed at $100,000 that's good, but if it won't sell above $85,000 (look at home sales in your neighborhood and find out what homes are REALLY selling for), then assessed value is squat.
We can thank the unfunded No Child Left Behind program for this problem in assessments. School taxes are usuially a function of property values. If a school system is short of funds, it makes sense that in that area, houses' assessed value is likely to be above true market value. Case in point: a neighbor three doors down from me lost his home, assessed at $135,000. When it went up for auction, the starting price was $100,000 - and NO ONE bid. Consider this problem before you consider a refi, no matter how desperate you are.
I would not be surprised if this is an issue all over America. It's especially bad in places like my home county in metro Atlanta: our county is one of the twenty fastest growing counties in the nation, which is straining our school system's finances terribly. Homebuilding is a land-office business here (bad pun, sorry). The building codes are particularly lax in my home state, which makes matters even worse.
Be very careful when considering your options, folks. A home is replaceable only if you can afford one.

Mac in Ga

[hobbit709]

6. Debt

Any time the banks and insurance companies are in favor of something, they're never in your favor

[AlienGirl]

7. I've been worried about this...

Add in even a small dip in the real-estate market, and it looks like a recipe for disaster all around.

Tucker

[WannaJumpMyScooter]

25. No kidding. Seen it before here in the NYC area.

Oddly enough, it was caused by Reagan's defecit.

Hang on tight folks, this is gonna be a bumpy one.

Tucker, how you doing?

[AlienGirl]

27. Doing so-so

The days I don't work, I go to college. The days I don't go to college, I work.

Tucker

[mia]

8. The story of Mr. Knox is so sad.

:(

[Bluebear]

9. Lost another house to diTech!

People are going to consolidate themselves into ZERO equity on their property. Add a real estate slump and you end up with no nest egg and huge debt.

[janx]

20. Exactly. Much of this refinancing craze is due to people who

have racked up a lot of debt and/or lost their jobs.

[BlueStateGirl]

10. While this is a sad story, it seems like fiscal common sense to me.

A lender can take your home if you don't pay. Credit card companies can not take your home. They really can't take anything from you. It seems foolish to trade in unsecured credit card debt for a secured debt against your home.

[Digit]

37. Well said: Secured debt-they can TAKE your home,

Unsecured, they can't.
Also watch for compound interest on some of these loans...miss a payment and kiss your home goodbye.

[malatesta1137]

11. the article is partly incorrect

personal bankruptcies are rising, not declining.

And there's nothing 'humiliating' about filing for bankruptcy. I did it July 22 and wiped out $18,000 plus in credit card debt. I was also able to keep my car and apartment, since my equity is within what the law allows.

In fact I feel GREAT, it was fantastic to stiff Visa and Mastercard for a change, after being stiffed by them for so many years. And guess what, I receive more offers for credit cards now than before, so much for damage to your credit. Fuck Visa, fuck Mastercard and fuck Bush.

[colonel odis]

13. just out of curiosity, how had the credit card companies stiffed you?

(i filed bankruptcy myself nearly 15 years ago.)

beware. you'll pay exorbitant rates when you try to finance anything like a car or home until it comes off your record.

[Media_Lies_Daily]

14. Do you call exorbitant interest rates....

...by what amounts to legal loan sharks NOT getting stiffed by the credit card companies?

What's the difference between paying a 14%-25% annual interest rate to those extortionists and what you might have to pay in interest rates after you declare bankruptcy?

[colonel odis]

33. if you get in over your head, it's one thing. but i have a problem

with someone acting like they didn't know the credit card companies were vicious scumbag whores to begin with.

what part of 21% wasn't on the contract?

[malatesta1137]

21. how?

hmmmmm by charging me 19, 20, somtimes 21% interest?

[SOS]

29. Amex charges 26%

if you miss one payment on their "sign and travel" scam.
In our state, loan sharking starts at 21%.
Amex gets around the usury laws by incorporating their loan sharking operation in a state like Delaware which has no limit.
Beware!

[jdj]

19. they forced my parents into bankruptcy.

Two of the companies that held their cards were sold to other companies, and they promptly got letters in the mail saying that they had too much debt and therefore their interests rates were going to double. My parents said fuck this and filed. I can't say that I blame them, this is such a dirty trick, lend someone money on certain terms, then turn around and say, oops you've got to much debt so we're going to screw you.

[malatesta1137]

22. I advise EVERYONE to file for Chapter 7

if (BIG if) your equity is within the amount your state law allows and they cannot take your property away from you.

The US banking and credit card industries are both extremely corrupt, they practice nothing but legalized extortion. Interest rates today are criminally exorbitant, my bank charges me $35 for an overdraft check.

Before filing, I tried to consolidate with Cambridge/Brighton. They also stiffed me, promised to repay my cards, but kept the first payment of $475 to themselves without telling me.

So my record will be stained for 10 years, it's not a terribly long time and a great opportunity for me to learn how to live ON WHAT I EARN. I am glad I have filed, I am a person out of prison.

[Almost_there]

40. What are you actually saying? You advocate theft?

I think you should actually sit back and think about your words. Let's see here, let's take a little logical look at what you are saying in a few short steps.

1) Apply for unsecured credit cards.

2) Buy lots of stuff.

3) Don't pay credit card companies for said stuff.

4) Declare bankruptcy, screw the system!

Hmm. OK, how about if you make it a lot easier on the trees involved, and just go out and rob someone, alright? I mean, that's EXACTLY what you are advocating, psuedo legalized theft. You do realize that, don't you? Hello? Anyone home there, McFly? Again, I am not saying that there are not a LOT of completely necessary and legitimate bankruptcies, but, how would you like it if you sold something to someone, and well, they just said "F You, I'm declaring bankruptcy! HAHAHAH!! You can't do anything now, you scum sucking debtor! You make enough money!"

See, the problem I have with what you're advocating is that you don't take into account that SOMEONE has to pay the piper. Visa doesn't just print more money, Mastercard doesn't just smile and say "Aww, shucks! They got us AGAIN!" No. They raise rates. They charge fees. They have LAYOFFS! Thanks for contributing to this shit ass economy! You've now received goods and services and HAVEN'T BOTHERED PAYING FOR THEM! That's a really great moral lesson to teach our kids, maybe you should go around on a school circuit or something.

Again, I am very sorry that you found yourself in this hole, I have been saddled with debt, and I have worked hard to get myself out. I hate seeing interest on any credit card statement, but, its not like some shock that came from up high. I damn well knew what the contract said (yes, it is a contract, you borrow their money, they charge you interest. Pretty simple). I've had 9.9%, 6.9%, 3.9% and I KNOW if I default it can jump up to 24.99% in a heartbeat. So, I guess I'm the idiot for paying their scandalous interest, right? I NEEDED to put on the deck, I NEEDED to buy that 32" TV to see the debates, because the old 25" wasn't enough. I simply equate filing bankruptcy and then advocating others to do it with theft.

~Almost

on edit: spelling

[NVMojo]

26. I talked to a local banker the other day

who said that there has been an uprise in people who are just a few steps away from retirement who run up all credit debt possible and then file bankruptcy. She said this is the new retirement plan, you walk away with one vehicle and one home intact, get to keep all unsecured items from the credit cards. But you gotta hide some of it in some places from the probate officer so he doesn't seize anything of value for auction. Sort of makes one dizzy.

[wackywill]

Be careful here

When filing your are required to swear an oath as to your financial condition and that includes your total assets. Wouldn't want to recommend purjury.
Bankrupcky is the average persons (best) chance to start over financially. However what I've seen over and over again is that as a person recovers from bankrupcy he/she just starts all the behaviors that got them there in the first place. The key is LEARN how to live within your means.....not easy today.

[wackywill]

35. Be careful here

When filing your are required to swear an oath as to your financial condition and that includes your total assets. Wouldn't want to recommend purjury.
Bankrupcky is the average persons (best) chance to start over financially. However what I've seen over and over again is that as a person recovers from bankrupcy he/she just starts all the behaviors that got them there in the first place. The key is LEARN how to live within your means.....not easy today.

[Almost_there]

34. You're glad you "stiffed Visa and Mastercard for a change"?

I'm sorry to actually side with Visa and Mastercard on this one, but, you do realize you didn't actually "stiff them", right? You stiffed me and just about every other credit card holder for your debts. I am sorry, but, let's face the facts, ok? Visa doesn't sit there and pout, and say "Rats! Another bankruptcy! Shoot! At this rate we'll be out of business!" No. They pass along your debts to every single one of their card holders.

Now, I dont' begrudge anyone filing bankruptcy, I've never done it, and I honestly don't ever wish to. My debts are MINE. Not Visa's, not my mortgage company's, not Mastercard's, or American Expresses. MINE. So, when you take such a smug attitude towards "stiffing them" after they stiffed you for so long, well, no one actually A) Forced you to get their card, did they? B) Buy the things you did on the card they didn't force you to get? C) Not shop around for better interest rates. So, how exactly were you screwed again? You essentially performed a legal theft of services from Visa. Before you scream, allow me to say I know, I'm sure filing isn't easy, it is a pain in the ass, no one WANTS to file, and many times it is necessary to keep afloat. I've worked for a business that declared bankruptcy, and it was ugly. And it was back in 97, and they are still around today and as strong as ever.

But, for you to actually believe that you've really pulled a fast one on those stupid credit card companies, I'd like to thank you in advance for those ridiculous fees and rate increases that come down the pipe. Flame away, but, again, NO ONE forced you into getting into debt, getting the credit cards, and buying the things you did. I believe that we as responsible citizens have to be responsible for our actions, and perhaps I'm more disgusted at your attitude than the situation, which is sadly common in this country and this economy.

If this happened in March, I truly do wish you have gotten everything behind you and better days are ahead!

~Almost

[KoKo]

12. The "statistical numbers" in this article are really overwhelming....sad..

if there are this many people...how many more "suicides" are there going to be...It's awful...reading the numbers.

:-(

[sendero]

15. Home equity loans...

... were illegal in Texas up until a few years ago. Folks are playing with fire when they take one, but so much of what is wrong with America is total economic illiteracy, for lack of a better term.

People who don't understand how money works aren't likely to keep theirs for very long.

People - NEVER PUT YOUR HOUSE IN JEOPARDY UNLESS YOU HAVE ABSOLUTELY NO OTHER OPTION, i.e. you are in dire need of medical care and there is no other way to get it.

[BiggJawn]

16. A house down the street went at auction recently...

They post notices of Sheriff's Sales and the like on the board at the IGA. this place had $107,000 worth of mortgages against it.
It is a 1 1/2 story cottage, built maybe in the 1880's. Victorian style features, interesting windows, etc.

Now for the BAD stuff...The chimney was failing, it has needed a roof for so long that there are areas of roofing cement where there used to be shingles, in short, it ain't worth 107 kilobucks in Bob Villa's wildest wet dreams...

I figure somebody DiTeched themselves into one HELL of a hole buying toys and trips instead of fixing their shack...

[AP]

17. NEVER convert unsecured debt (credit cards) into secured debt (mortgage)

That's FUCKING insane!

Paying 20% interest is fucking insance, but putting your house at risk is even more insane.

[kysrsoze]

24. This doesn't make sense at all - a second mortgage can be good for you

I took out a second mortgage to pay off all my credit debt and cash out to pay my ex-fiancee for her portion of the equity when she moved out. This saved me from having to sell my home. I refinanced one more time to roll it all back into a single mortgage. Granted, I lost equity in my home, but I was much more able to make the payments and have money to live on.

With a second mortgage, the rate is almost always MUCH lower than that of credit cards and it consolidates all your debts into one payment which is usually significantly lower than all the other payments combined. The plus is that you can claim those interest payments on your tax return.

The only two ways I think you can seriously get into trouble is if you're working with some disreputable company or you take out a line of credit which is too high and you continue to spend the whole thing rather than just pay off your other debts.

It doesn't add up.

[AP]

28. You are taking a big risk if you convert unsecured debt to secured debt.

You should always pay your mortgage before you pay your credit cards.

Obviously, if you can get out of credit card debt, and you can do it safely, you should do it.

Don't pay your credit card bills late, and if you have 1,000 bucks in the bank and 500 in credit card debt, and you have no problem paying your mortgage, you should be paying off that credit card debt with your savings.

However, don't drive yourself into secured debt to pay off your credit cards unless you KNOW that you're going to be able to meet the mortgage payments. That's crazy.

People have been able to take a second mortgage to pay off credit card bills because their houses are going up in value. That's OK so long as you can reasonably lock in the gain from the house. If there's any risk that your going to have negative equity in your house you are totally fucked. You're going to loose your house because you paid off your credit card bills. Had you merely defaulted on the credit card bills you wouldn't lose your house. The credit card bills are secured by nothing. The mortgage is secured by your house.

Get it?

[doni_georgia]

41. Big 'if'

The problem with trying to finance anything is that you pretty much have to prove you could buy it outright before you can finance it. Catch-$22.
There are in fact some good companies out there....I have had only one problem in five years on our current mortgage, and that was handled by the institution with tremendous professionality and concern. It was a pain, but they did do the right thing after the foulup, and it's definitely improved my business relationship with them. How my bank handled the matter was another story, but I did get it straightened out finally. Worked out better than even in the end, since someone had turned in two rolls of Franklin half-dollars that day and the bank manager made the teller let me buy them.

However - sorry about the tangent there - if you feel you NEED a refi to support your lifestyle, you're probably approaching the problem from the wrong end. You're far more likely in this instance to get yourself into a bad business deal because you're vulnerable and the company you're dealing with knows it. A good company knows the value of keeping a customer. A bad company knows the value of squeezing one.

Mac in Ga

[AP]

23. Two important aspects of this story: (1) banks are looking after banks...

...when they tell you to convert credit card debt into mortgage debt, and (2) many banks MAKE you do this when you refinance: they tell you you have to pay off your credit card with the highest debt. They should actually prefer that you don't so that you have money to pay off your mortgage. But they make you convert some of that unsecured debt into secured debt.

[Gregorian]

30. What was that Einstein quote? The most powerful....

Edit- excuse the grammar. This was precoffee.


The most powerful force in the world in a mortgage? I knot that's not it. But he understood.
My very first design professor in college said, The Golden Rule- He who has the gold, rules. I have since ammended that to He who has the black gold rules the world.

I have been lucky enough to used the real estate market to earn enough money to own my house. I had always been told that owing money was not good. Besides, I watched my father work my entire young life away, when had he not owed a puny $30k on his house, he might have spent his time with me.

Here's an interesting thought I woke to one night- The interest rates are the same now as they were in 1960. A house was paid off with a conventional 30 year mortgage, in 30 years. With those same payments, todays house takes 200 years to pay off. It's easy to see because that $30k house is now $750.

I went on a kamikazee run with credit cards, to get a home. But after being totally freaked out about it, and having made enough money, I paid them off. But I cannot imagine living that way.

[jmcgowanjm]

32. Compound interest

Depending on the source, Albert Einstein referred to compound interest as the eighth's wonder of the world, the human race's greatest invention, or the most powerful force of the universe.

en.wikipedia.org/wiki/Interest

[jmcgowanjm]

31. US Bankruptcy Courts are The big business

An example:
http://announcements.news-leader.com/fortherecord/bankruptcies/

Just look at this Googled Page:
http://www.google.com/search?hl=en&ie=ISO-8859-1&q=bankruptcies+at+record+2004

Wanna have some fun? Tell your local county court
to start sending you monthly list
of bankruptcies for your community.

BTW-the Eastern District of AR and Memphis
lead the way in per capita bankruptcies year after year.

[Bo]

38. Looks like the Big Boys are ready to "REEL IN"

Saw this coming 2 years ago...and with the new bankruptcy laws in place, hold tight.