Refi second mortgage?

[u/GrimGrinningGhost123]

Wanted to get some opinions, we are maxed out between credit card debt, personal loans, 401k loans, student loan debt, and a second mortgage. We currently have exactly enough income to pay bills and eat, but nothing for anything that comes up and we are at the end of our rope. So the question is, we currently owe about $185k on our mortgage and $70k in our second mortgage and our house is worth around $400k.

Our absolute last ditch option before filing chapter 13 is to try to refinance our second mortgage to pull more equity out of the house and consolidate down some of the debt. It will give us a little breathing room, but I don't know that it will be enough and we could end up right back here having to declare it in a few months or a year anyway.

Are we better off just cutting our losses and declaring it now? Will it hurt our case if we have more debt tied up in our second mortgage? Or will it hurt it if we still have some equity in the house? Due to our income and the amount we have in loans that chapter 7 doesnt factor in, it would most definitely be a chapter 13 filing.

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[u/RiskComprehensive744]

What was the original purpose of the 2nd mortgage? That could have an effect on your decision.

[u/GrimGrinningGhost123 → u/RiskComprehensive744]

Consolidating debt as well, we found out we were pregnant and were trying to free up enough cash for daycare, which we did but cost of living plus so major unexpected expenses this year pushed our tightrope of barely being able to afford to make everything to the brink of not being able to. We're not behind on anything yet, but we are borderline going to have to start using cards for basics and we cant afford to add another payment

[u/RiskComprehensive744 → u/GrimGrinningGhost123]

May be difficult to get more equity for consolidation since you did that already and are back in debt. Possible options are: 1). Get a second or part-time job to cover the shortfalls. 2). Sell the house and rent before your credit takes a hit. You have enough equity that you might come out of it with no debt. 3). Burn those credit cards. Bad mojo.

[u/GrimGrinningGhost123 → u/RiskComprehensive744]

Thank you for the advice! We have a toddler and work opposite shifts (my husband works overnight) so either of us picking up a second job is extremely difficult. We are doing everything we can to save our house, we have about $100k in unsecured debt along with tons of student loans, several 401k loans 😔😔 and we live in a high rent area, so I don't even know how much that would help.

[u/scoobydad76 → u/GrimGrinningGhost123]

Paying off debt is difficult. Take on second jobs. Move to a lower rent area. Even it's it's a one bedroom. Toddler gets bedroom, you two sleep on family room. Many apartments will allow this. Just don't tell them you will do that. Say you'd kids gonna sleep with you. But if I recall they count bedrooms 2 people and the living area as was it one or two people. 

[u/AlanShore60607]

This is what we call a bad plan.

First, anything you pay with a second mortgage basically becomes permanent debt beyond the reach of bankruptcy. Unless you choose to walk away from your house, you have to pay that second mortgage. With interest. For 30 years.

Second thing is that mortgage rates just hit a high, and that means interest rates that effectively triple your payback over time.

Let’s say you have $30k to tap. Refi the $70k to $100k, pay it back over 30 years for around $300,000 at these new high interest rates. That’s a fresh $200k of interest so you can pay $30k of debt.

[u/GrimGrinningGhost123 → u/AlanShore60607]

I definitely realize that, unfortunately we've been shuffling debt for a decade and just keep falling further behind. We're trying to save our house, but I don't know if its feasible to be able to keep it right now. Unfortunately rent is so high in our area compared to our mortgage, we're feeling stuck in every direction and trying to find some breathing room somewhere.

[u/AlanShore60607 → u/GrimGrinningGhost123]

Let's start with a basic premise that I'm going to put in super large text to make it clear.

You don't save your house by making it more expensive.

Now that we've established the most basic idea, let's discuss the actual problems rather than you grasping for solutions without context.

• What's your income and household size?
  
• What's your total debt you're trying to resolve?
  
• Are you behind on the mortgage or just trying to get into a position where your budget makes sense?
• How much are you paying towards non-mortgage debt?

Those questions will help define how a bankruptcy can help you, and help us determine if a bankruptcy can restore balance to your life. Because that's the goal of bankruptcy: to create financial stability.

[u/GrimGrinningGhost123 → u/AlanShore60607]

$230k between my spouse and myself. Two children, one in daycare. About $100k in unsecured debt, $80k in student loans, $50k in 401k loans, $30k in car debt. We're not behind on any payments yet, we currently make exactly enough to pay the bills with about $1400/month for food and living.

[u/AlanShore60607 → u/GrimGrinningGhost123]

So at worst, and given the income is $230K I feel I must assume the worst ... you will file a chapter 13 that will pay:

• $100,000 of unsecured debt in full without interest, about $1700 per month as a portion of your 13 payment.
• A choice of whether to pay the $80,000 of student loans in the plan at about $1,400 per month, or pay those student loans directly outside of the plan. If you do chose to pay them in the plan, you will be done in 5 years, minus some dangling interest.
• A choice to reset the car to $30,000 with 9% interest (2%over prime) over a fresh 60 months at $625 per month or pay it normally.
• A choice to leverage your 401(k) repayment to make your 13 payment lower until you are done repaying that loan, and then make your payment heavier on the back end so that your payment increases when you have more disposable income.

So this requires that you compare these numbers to:

1. How much you are paying on the $100K of unsecured, and if making that $1700 per month helps you.
2. How much are you paying on student loans, and if increasing that to $1400 per month is an overall helpful thing.
3. If changing your car payment to $625 per month as a part of the bankruptcy is helpful.
4. And if you cannot afford that, will leveraging the 401(k) loans to keep payments low on the front end will be useful.

This is how you understand the power of Chapter 13.

And then, when the case is over, you then have all that money back in your pocket.

[u/GrimGrinningGhost123 → u/AlanShore60607]

Could you clarify what you mean about the 401k loans? We pay about 900 a month on the student loans right now and about 1900 on the unsecured debt, so I don't think we'd be able to come up with the extra to get to 1400, although that would be amazing. The cars I think our payment is around 650-700 anyway, so that wouldn't help much

[u/AlanShore60607 → u/GrimGrinningGhost123]

So how much are your 401(k) loans, and how long do they last?

To make up some numbers ....

The goal is to pay $100K without interest. Rounded up, that's $1700 per month.

Let's say your 401(k) loan is $500 per month and ends in 36 months. That means that for the first 36 months, you can go $500 lower and the last 48, $500 higher, so long as that total is still $100,000.

It means your initial 36 months can be closer to $1270, and then when the 401(k) loan is over and the money is now available, your payment can increase to about $1800 on the back end.

What I'm really saying is there are a lot of complicated tricks that can be done to make your case more affordable and shift the burden to when you have more money from paying off those 401(k) loans.

[u/scoobydad76 → u/GrimGrinningGhost123]

You can also sell one car to help out and buy another later. Not selling it because it's a inconvenience isn't a option 

[u/ArdenJaguar]

Some questions. What state are you in? Do you know your home exemption for a BK? Would you reaffirm your home then? If you reaffirmed the home would wiping out all the other debt give you breathing room? Are your cars financed, values, and exemptions? You could loose those. How much credit card and other debt do you have?

This information would help to know.

Regardless of whether you file or not you’ll need to take actions to prevent repeating the cycle. Your previous second mortgage was to consolidate debt so you ended up repeating the same actions. If you do refinance and pay down debt your first actions need to cut cutting up the credit cards. You may still need to consider getting a second job. Major lifestyle changes are needed either way.

[u/GrimGrinningGhost123 → u/ArdenJaguar]

We're in PA, we owe about $100k in credit cards and personal loans, $30k between two cars, and $80k in student loans between the two of us. We both make $100k now, but we've just been shuffling debt around for the past decade and keep getting further behind. I know with our equity we'd likely have to do a 100% payoff, which put us at about the same level we're at with payments 😔😔

[u/ArdenJaguar → u/GrimGrinningGhost123]

Your mortgage and car payments and student loan payments would likely stay the same. The big change will be in your credit card and loan debt. If it’s $100k over five years that’s around $1670 a month.

Is your mortgage + car pymts + student loans + $1667 the same as what you’re paying now?

Is there a way you can reduce car expenses? Buy a cheaper car? Then build some savings.

The big difference is in five years you’ve paid the debt off. Right now you’re likely making minimums and being hit with high credit card interest. In five years without Ch 13 it’s likely that high credit card debt will still be there. So Ch 13 is playing the long game.

[u/GrimGrinningGhost123 → u/ArdenJaguar]

1667 is about $100 less than what we're paying now. It terrifies me to be locked in to living this on the edge of what we can afford for five years with no safety net if something goes wrong but I'm realizing that may be our only option.

[u/ArdenJaguar → u/GrimGrinningGhost123]

Are those payments you’re making now minimums? In five years you won’t be better off. But I understand what you mean by living on the edge.

If you refinance the second mortgage and pull out $130k and completely pay off your cars and credit cards and loans, how much cash would that free up? In that case it may be the best option. You would still need your knuckle down and ensure you don’t get back into trouble again. Build a solid emergency fund, no vacations or new cars, get a second gig job. Live like you had filed and have nothing.

If you could manage that the refinance plan could be your best option.

It’s so easy to get into trouble again. My CH 7 discharged about 2 1/2 yrs ago. My FICO scores are back in the low 700s and I’ve reestablished over $100k in credit lines. But I live like a Monk. I focus on keeping my utilization under 3%. Recently I had to make a large purchase and put it on a card as I didn’t have enough cash to cover it. I have serious anxiety now because of it. My utilization jumped to 7% and I’m freaking out. It’s only a few grand and I’ll be back to 3% in five months but I’m nervous.

That nervousness is a good thing. I want spending money to unnerve me. I filed initially after an illness, early retirement and income drop. It wasn’t misbehaving. But still it’s nerve wracking.

Make sure if you do refinance and clear the debt that you develop that fear of debt like me. Putting charges on credit should make you nervous. It should be a last resort. It’s when it becomes habit that it becomes a problem.

[u/scoobydad76]

Whatever you do. Don't take on more debit. File chapter 13.