What should we do? We have over $40,000 in credit card debt and $80,000 in a second mortgage. The value of our house equals our first mortgage and we had to move outside the area for a job opportunity. There have been no offers on the house. We don’t qualify for a Chapter 7 discharge and a bankruptcy attorney explained that over the next five years, we will end up paying all income, above our necessities and rent, towards our Chapter 13 payments to pay off the debts. We would not be able to save a penny for the next five years, even for emergencies. The legal fee for filing the Chapter 13 is $4,000, and we are not sure what this covers. We are current with all our payments and have some credit cards maxed out, while a couple still have unused credit. The bankruptcy attorney advised us to stop paying everything: no more payments on credit cards and no more mortgage or other payments on the house, let have go into foreclosure.
Before you commit yourself to paying your entire disposable income for the next five years towards paying these debts and not able to save anything for a rainy day, perhaps you should see what happens if you stop paying some or all of your credit card debts. You can then negotiate your credit cards and use the savings over the next few months to settle one or two of the credit cards. There is a risk that all credit card companies will close your unused credit lines under the “universal default” clause in many credit card agreements, but maybe not or maybe they will not close immediately.
As to the two residential mortgages, consult with a licensed real estate agent or broker in your area, who has experience in short sales. Perhaps you sell the house and satisfy both the first and second mortgages, to avoid foreclosure by either. Selling the house should payoff the first mortgage. Dealing with the second mortgage as an unsecured loan, will force them to settle for much less. I had a prospective client tell me that the second mortgage lender contacted them after the foreclosure and proposed to settle for 10% of the balance. That’s 90% off. If you can get a good settlement, then this will lower by about 2/3′s your unsecured debt.
If you are successful with the second mortgage and a few other debts, you can then deal with the remaining debts in the civil courts, if they file credit card lawsuits. I represent clients against creditors and debt collectors in credit card lawsuits. Or, you can go back to the bankruptcy attorney with much less debt, which will give you much lower payments on the few debts included in the Chapter 13. The risk if a five-year bankruptcy where you have no wiggle room for a bad month, is that if you have an income disruption or unforeseen expenses, unless the court approves a modification of the payments, your petition will be dismissed. In this economy, five years is a long time to expect no problems.
My web site has a video that discusses all your alternatives if you are sued in a debt collection lawsuit. Please see: www.stopcollectionlawsuits.com