Massive credit card debt w/100% equity in home- what to do?

[Aces54]

Long time lurker (years, literally), first time poster.

I have dug myself into a real hole here, and have absolutely no idea what my options are, or even if I have options.

I relocated from FL to KY in '07 to be nearer my family. With me are my husband and my MIL- she was too old to have been left in FL alone. We had intended to wait until she had passed to come back north, but real estate was starting to drop so we moved up our plans and did well on the home sale- enough to pay off the mortgage, pay off all our debt except for one car (0% interest), and buy a home here in KY for cash.

Fast forward two years and I have $30,000 in credit card debt. My husband makes only $12,000 per year now, so you can see where my problem is- I am having difficulty affording the minimum monthlies and dip further into debt each month with one thing or another.

I was so happy that we were able to buy this home with cash after selling a previous home at the top of the market. But in hindsight we should have gotten a mortgage and kept some cash liquid for the start up/fix up expenses which are the bulk of the credit card use. Landscaping, fencing, heat pump, some medical stuff (I have no health insurance), and

general.... stuff. I did get carried away with the landscaping, my only hobby.

I care for my 88 year old invalid MIL and so am unable to leave her alone to work. She gives us a portion of her Social Security check monthly which helps tremendously.

If I return to work she will have to be put into a nursing home on Medicaid- something we are trying to avoid. And I would have to make more than she gives us for it to make sense, and in this economy I am worried about being able to find something at all. My trade does not work nights- strictly daytime work which I am now unavailable for.

Since our home is paid for that rules out bankruptcy, right?

Should we attempt to get a home equity loan to get out from under all this credit card debt?

Should we just cut expenses to the bone and struggle on as we are now?

Am I a candidate for a debt consolidation loan?

I find it odd that if I had zero CC debt and only owed $30K on our home we would be considered in great shape, but as we owe nothing on the house but have $30K in credit card debt we are considered in bad shape.

My CC interest rates are not that bad- I have $6K an AmEx "4.9% for the life of the loan plan", $8K Bank of America is 7.9%, $10K another BoA is 11.9%, and $6K WaMu (now something else, Chase?) is also 11.9%. I have a Discover, too but that is empty since they raised the APR on me.

My minimum monthly credit card payments are $700, but with our low income

and high debt could we even qualify for a home equity loan? I am 54, husband is 48.

If I just default on my credit cards would we lose the house?

What would happen?

I have never had a late payment ever, am current, and my FICO is down now to 695 (from last years high of 750) as my utilization increases.

So- do I have any options?

Stop using the cards, I know.

But what else?

I really hate to put the house on the line- it is the last home I ever intend to live in and I do not want to jeopardize it in any way.

Especially with all the new landscaping

Thanks for any comments...

[bingo]

First of all, how much equity is in your home?

Secondly, you can't support a family on $12K. Your husband for sure needs a better job. Until he gets one, he needs to pickup a 2nd job or some weekend work.

[Aces54]

We paid $112,000 for the house, cash, and did some improving.

Market value this moment will vary from that of course, but not by much.

[Denita]

Don't get a mortgage to pay off your credit cards. That is taking unsecured debt and making it secured by your home. That puts your home at risk.

People all over are losing their homes because they used their equity like an ATM - don't fall for that trap.

You do need to increase household income one way or the other - your husband gets a second job as bingo states or you get a job you can work out of your home and still keep an eye on your MIL. Do you have an extra room that you can rent out to someone for extra money? Your problem is an income problem.

Sell some items - extra vehicle you might have, art work, household items - anything that you have to generate some cash to pay off this debt.

Cut up the cards or sockdrawer the cards. Call the hardship dept and negotiate payments. Do not mention the equity in your home as you will not qualify for a hardship payment and their first comment will be for you to mortgage your home to pay off the cards.

One last thing, is there a less expensive home you can buy? If so, sell the one you are in and scale down; however, that is a last resort type action because you have large transaction costs (selling fees etc).

[Aerovette]

Don't get a mortgage to pay off your credit cards. That is taking unsecured debt and making it secured by your home. That puts your home at risk.

People all over are losing their homes because they used their equity like an ATM - don't fall for that trap.

You do need to increase household income one way or the other - your husband gets a second job as bingo states or you get a job you can work out of your home and still keep an eye on your MIL. Do you have an extra room that you can rent out to someone for extra money? Your problem is an income problem.

Sell some items - extra vehicle you might have, art work, household items - anything that you have to generate some cash to pay off this debt.

Cut up the cards or sockdrawer the cards. Call the hardship dept and negotiate payments. Do not mention the equity in your home as you will not qualify for a hardship payment and their first comment will be for you to mortgage your home to pay off the cards.

One last thing, is there a less expensive home you can buy? If so, sell the one you are in and scale down; however, that is a last resort type action because you have large transaction costs (selling fees etc).

Sorry, I have to disagree here. If there is NO mortgage, it makes a big difference. Taking a SECOND for debt is crazy, but having a single 30k mortgage and zero debt is a great position to be in (provided you BURN those cards).

The blended interest rate of those cards far exceeds that of the mortgage. I think it is the smart thing to do. The loan should be no problem since there is NO WAY the house is worth less than 30k.

I say go for it, BUT you HAVE TO HAVE the DISCIPLINE to not use the cards again or you will be in a REAL MESS. That is CRITICAL and can't be stressed enough.

In fact I would go even further and say you should include a few house payments in the mortgaged amount so you can make a few payments during the job search or second job. If you never need it, that's great, but it is there for emergency.

I had 90k in my house and a balance of 20k and borrowed 60k to pay all bills and car notes and it was the BEST move I could have made. Those cards would have haunted me forever and ONE missed payment and your rate goes through the roof. No more juggling. One check is sent each month for the mortgage and that is the total debt.

[Denita]

From AerovetteI say go for it, BUT you HAVE TO HAVE the DISCIPLINE to not use the cards again or you will be in a REAL MESS. That is CRITICAL and can't be stressed enough.

This is the reason why I said to not finance the home - the temtation to borrow again may be too great for this family based on their past actions. Remember they moved to the house with enough funds to buy it free and clear and THEN racked up all the cc debt.

Also, the income is only $12000/year - that's $1000/month. Before they start to borrow more $$$, they need to figure out their income problem FIRST, JMO.

[bingo]

Well, bk is no help. Ky. uses federal exemptions and, you can only exempt a bit over $20K.

The real problem here is not debt but lack of income. You just gotta stop using the cards and make more money. I seriously doubt you'd qualify for a HELOC with a $1K/month income.

[Bigwoodystyl]

...Should we just cut expenses to the bone and struggle on as we are now?...

The yearly cost of the finance charges on a debt of $30,000 at your APR and balances is roughly $2838 ($237/month). That assumes you make interest only payments; in practice, you'll be forced to make at least slightly more than interest only, so this yearly total in finance charges will be less, (provided you stop using the cards and pay them down).

If you open a 15 year mortgage for $30k, your monthly payments will be less, but over the life of the loan, you'll pay roughly $15-$20k in interest depending on your mortgage APR. With no house payment and no litigation or delinquency hanging over your head, just bite the bullet and pay off the cards. Find a way to bring in more than $12k/year. You'll save money and you won't risk your house.

Keep in mind, you should make minimum payments on all of the credit cards, but one. On that one, make as many payments for as much as you can afford. Once that one is paid off, move to the next. Repeat this until they're all paid.

If I just default on my credit cards would we lose the house?

What would happen?

These are the wrong questions to ask if you're trying to get rid of the debt.

However, this is the right place to ask that question. Take some time to read more posts and you'll find your answer through the empirical experience of others. Do this vicariously and not autobiographically.

[Aces54]

The yearly cost of the finance charges on a debt of $30,000 at your APR and balances is roughly $2838 ($237/month)......

If you open a 15 year mortgage for $30k, your monthly payments will be less, but over the life of the loan, you'll pay roughly $15-$20k in interest depending on your mortgage APR. With no house payment and no litigation or delinquency hanging over your head, just bite the bullet and pay off the cards. Find a way to bring in more than $12k/year. You'll save money and you won't risk your house.

This is what I thought- we really, really, really don't want to involve our home.

The income thing is a whole story, but suffice to say with what the MIL gives us we are squeaking by.

I should likely give up the newer of the cars, but as I said it is 0% interest and I have only two years to go with a balance of ±$10K and only 6K miles on it. I do need something reliable with an invalid in the house and our second car is a beater. And once we lose her I will need it for work.

We will hang on- we aren't behind on anything, so perhaps with some further cutting back and selling a few items we can squeak by.

We will see a $1200-1500 tax refund- is that better spent spread among the cards or focused on only one? I think I should put it all on one but can't decide if it should be the lowest balance card (which is a tiny payment) or the highest APR card which is also the largest monthly minimum?

Thanks for not beating up on me

I know I've screwed up, and beat myself up plenty already.

[LadynRed]

Since our home is paid for that rules out bankruptcy, right?

No, it does not. With 100% equity, your only real option is a Ch 13, which lets you keep your house and pay off a percentage of your debts.

[Denita]

Just thinking about your situation a little ...how much is your car payment on the one you owe $10k?

I know the interest is zero - I am talking about the actual monthly payment.

Is the vehicle upside down? It shouldn't be with only 6000 miles on it:!:

If you sell it and get something reliable for the $3500 range (I am thinking of the funds you have plus other things you might sell so you can pay cash). That might drop your monthly payments considerably.

[Recovering Attorney]

I;d take the refund and pay off the smallest balance card first. Then sock-drawer that baby

I'm not wild about mortgaging the house since it seems you need/use the credit cards. Unless your income improves dramatically, I might not do it.

Concentrate on paying them off, one at a time. Consider letting one of them go for now.

[OMGWhatHaveIdone]

Don't get a mortgage to pay off your credit cards. That is taking unsecured debt and making it secured by your home. That puts your home at risk.

Call the hardship dept and negotiate payments. Do not mention the equity in your home as you will not qualify for a hardship payment and their first comment will be for you to mortgage your home to pay off the cards.

I second this! When you call your OC's immediately ask for the hardship dept as the CSR's can not help you with this. Don't even bother trying to explain the situation to them. Just keep asking for the hardship dept until they transfer you. Once there, talk with them and ask them what your options are. Again, as Denita stated, DON'T mention any equity in your house. Since you paid cash for it, the house isn't showing up on your CR, and as such, the credit card company doesn't even have to know that you own a home. Don't give them that little piece of information. They will try to use it against you. You should also not let them try and talk you into using another card to pay off their debt. Don't even mention any other cards that you have. You are only calling to talk to them about the account that you have with them and you need a viable solution to your situation.

Write down the date and time you called, the name of the person you talked to, their phone number with extension and the address of where to send correspondence to. If you can reach a solution with the hardship department, make sure they send you something in writing outlining the agreement you have made.

Do not let them have any bank account information. Even if they tell you they can't help you unless you supply this to them. You need to stay in control of your money and giving them this information is like signing over your husband's pay check. Tell them that it's not an option if they ask.

One last note: Budget your money. Find out where you are spending money on extras. For instance, do you eat at Mickey D's? If so, cut that out of the budget. Does anyone in the house smoke? They may have to quit in order to free up the money they are spending. Take a look and see where the small stuff is because often times it's also the small stuff that adds up. I'm not saying ya'll smoke or eat fast food, but those were just two examples of small things that you can cut out of your spending that will go a long way in providing extra wiggle room for you.

Also, contact your local AARP office. They might have programs that your MIL qualifies for, or they might put you in touch with programs that are out there. Your MIL might qualify for some type of state assistance based on the fact that she is elderly and needs constant support from you and hubby.

[Aces54]

Just to bring some closure to this thread-

We did opt for the HELOC.

I know, I know... hear me out.

First, I realized that my 12,000 a year stated income was take home, our gross last year was 18K. He has managed to take on enough extra responsibility to bring that up another 5K or so. I myself have applications in everywhere, but again I have an invalid to care for so it's not as simple as it sounds. She has upped her contribution to the household as well, so we're teetering at the 25K a year mark now. Yippee.

My draw on the HELOC was 26K and this is all I expect to use. We were approved for 55K on prime plus 1%, with monthly payment 1½%.

All credit cards now stand at zero and they are in my Mothers possession- she is a pit bull with finances.

My main reason for making this decision was two credit cards that rate jacked me to 22%. I am yet another of the "never late, never over limit" people who saw their rates raised for no reason. It was unreasonable and tipped the cards towards a HELOC. To my mind I simply moved my debt to a lower interest rate. I know that puts our home on the line and that scares me into commitment. This is my forever/retirement home and I will not lose it.

I understand that this is against most of your advice. I understand that we can not run bills up again. I have already made massive changes in several key areas of our budget and think that if I apply myself we can get this thing paid off in 4-5 years and still manage to get an emergency fund off the ground. This puts our total "housing" at 25% of our income, which I believe is an acceptable ratio?

So thank you for all your advice and time.

I will continue to read and lurk as personal finance, budgeting, and paying this thing off are my new hobbies.

If I remain committed and resolute I can do it.

Best of luck to everyone out there who is struggling. The stress is tremendous and the answers are never easy.

[ALVA]

Although it's no fun, it might help in the short term (to at least build up some cash reserves) to try to find a job with an opposing shift to your husband's. If he works days, try to find a night job, or vice versa. Even stocking at WalMart or whatever.

When we had a cash flow problems towards the end of last year, due to sudden increases in our homeowners and health insurance premiums (30-days notice), I took a PT nights and weekend job at a retail store. This let us keep our son out of daycare, and helped us build our reserves up to cover the increase while we restructured our budget.

[Aces54]

Although it's no fun, it might help in the short term (to at least build up some cash reserves) to try to find a job with an opposing shift to your husband's. If he works days, try to find a night job, or vice versa. Even stocking at WalMart or whatever.

When we had a cash flow problems towards the end of last year, due to sudden increases in our homeowners and health insurance premiums (30-days notice), I took a PT nights and weekend job at a retail store. This let us keep our son out of daycare, and helped us build our reserves up to cover the increase while we restructured our budget.

Yes, as I said I have applications in everywhere- even the dreaded WalMart.

[Dre]

We will see a $1200-1500 tax refund- is that better spent spread among the cards or focused on only one? I think I should put it all on one but can't decide if it should be the lowest balance card (which is a tiny payment) or the highest APR card which is also the largest monthly minimum?

Do you mind posting the amounts with the monthly mim?

Usually you want to take the HIGHEST interest rate and start to pay it off with an additional amount (ex. Mim. payment: $50 Add'l pmt: $100 which makes the monthly payment for that card: $150). With the others: only the mim. payment until the HIGHEST interest one is paid off, and then you snowball it down.

Sometimes, if I have a really low balance and I can PIF, I would do that, and start with the next credit card in line to start to pay off.

So if it's a tiny payment, go for it! Pay it off, sock drawer/cut up the card, and start on your next HIGHEST interest card and continue the snowball cycle.

Glad to see you got some extra cash in hand! Don't use it on landscaping

[whocares]

This is JMHO....

The interest on the HELOC would be less than your cards to begin with...

And having an asset like a house allows creditors to possibly put a lean on your property...which when it got high enough from the JDB's they could take your home.

I have been in your shoes....and got out of them...I fif anything I could to make an extra buck...I babysat kids after work, I sold stuff on Ebay, I sold stuff for other people on Ebay...I worked doing whatever I could...and now...I Love being debt free

It will be worth it in the end.

Good Luck:rolleyes:

[stop foreclosure]

This is JMHO....

The interest on the HELOC would be less than your cards to begin with...

And having an asset like a house allows creditors to possibly put a lean on your property...which when it got high enough from the JDB's they could take your home.

I have been in your shoes....and got out of them...I fif anything I could to make an extra buck...I babysat kids after work, I sold stuff on Ebay, I sold stuff for other people on Ebay...I worked doing whatever I could...and now...I Love being debt free

It will be worth it in the end.

Good Luck:rolleyes:

Agreed. Everyone has to reach a changing point where they have to decide that they will take action. I think of it in three questions to help. IF, WHEN, and WHO. The first question is important to tackle first... IF you are going to do something.. people worry about when they will do something, or who they will go with before they actually decide if they are going to do something. This can be stressful and a waste of time. Once you have decided IF you are going to do something, then you need to decide WHEN. Again when people worry about who they are going to use, or if they are going to do it themselves before they decide when, they will be spinning their wheels. In this market so many things are changing on the daily, you must decide when you are ready to do something, then focus on WHO you will be using to get it done. I think that this may help people who are confused as to where to start when they realize that they have reached a changing point. A point when their debt is no longer manageable.

[Bigwoodystyl]

Just to bring some closure to this thread-

We did opt for the HELOC.

I hope this works out.

My draw on the HELOC was 26K and this is all I expect to use. We were approved for 55K on prime plus 1%, with monthly payment 1½%.

All credit cards now stand at zero and they are in my Mothers possession- she is a pit bull with finances.

Eventually, prime will start to rise again. You have a variable rate loan. Does your HELOC offer you the option to lock in a fixed interest rate.

Many HELOC come in two parts.

1. A variable rate Line of credit, usually based on Prime or Libor.

2. A fixed rate fully amortizing term usually based on a 2 or 3 year T-bill.

The margins for the variable are generally different than the margins for the fixed rate. When the prime/libor is low, the variable makes more sense. When the prime/libor is high, the fixed rate makes more sense. You usually have the option to move to and from the fixed rate or the variable rate for a convenience fee of $25-$100, depending on the lender.

One day, Prime is going to rise again and if you don't have this Line paid off, you'll be looking at a high interest rate on debt that is now secured by home equity.

I'm completely against HELOC from an idealistic point of view, but I understand they can be necessary/helpful. I still think you should have bitten the bullet and paid off the credit cards without involving home equity.... this is even despite the rate-jacking on the credit cards.

Another point to make: most HELOC's default to an interest only repayment schedule. That is, if you make only your minimum payments, you will not reduce the principal balance. If this is the case on yours, you must try to make payments above and beyond the minimum due or you will be paying the bank forever.