How can I reduce my debt & improve my situation?

January 5, 2009 10:09 AM

I'm upside down in my house, have about $38k in CC debt. I make good money, but wanna try to find a faster way to recovery. Most the consolidators want my situation worse in order to make it better... & they all seem to offer the same basic thing, which i don't think is in my best interest. What is my best move from here?

my situation is;

I'm upside down on house (which seems to be common here in Florida)... owe ~ $365k, value is probably $280ish...
this is broken into 2 mortgages; 1 at $302k (30 yr fixed @ 6.375%)... NOT behind in any payments....
The 2nd at $54k (FRHEL ? - w/15 yr BLN @ 8%)... i am paying additional principle on this one of $150/month & ... same as the 1st mortgage...NOT behind in any payments.

i have about $38k in credit card debt... virtually all are 6-8% apr.... except 1..but that will be brought back down in 2 months.
I usually pay slightly more than the minimum each month & again, NOT behind in anything...

i make approx. $150k/year... (and that's after the 15% pay cut i just took) I think my credit score is around 700, but i'm not positive....I was told the only reason it's this low is my debt to income ratio... (being too high)

The Company I work for pays for my car & fuel, my wife's car has 2 years left on the lease @ $711/month (that I pay for of course).

We've reduced some incidental expenses, but seems to be a drop in the bucket.

I have a motorcycle i'm TRYING to sell that should generate approx. $14k.... that I intend to use that to payoff some of the CC debt ....

I've contacted a few debt relief companies... but they all seem to offer the same basic service.... they negotiate w/my CC co's to reduce my overall debt by approx. 40%... but only after I am 2 months late in payment (thereby in default)... This would destroy my credit (score), but reduce my debt by 40%...

My overall plan currently is to sell the bike, knock $38 to $24k... & stay on my same path until something changes...

I have no other income ... & many other obligations ... so there isn't much wiggle room.

At this point, I don't believe my job is in jeopardy, I just feel I'm passively sitting on the side lines & that I could do some thing else or perhaps there's a plan out there that could drastically improve my situation or at least get me on the path to recovery faster.

I am open to all suggestions...

posted by foodybat to work & money (20 answers total)

$711/month for a car? I don't suppose you can get out of that and use that $711 a month towards a less expensive car and more debt repayment?
posted by mkb at 10:22 AM on January 5, 2009

I use Money Management International - as recommended by other MeFites - and it didn't require that I was behind in my payments.

I have been pleased so far.
posted by k8t at 10:22 AM on January 5, 2009

Maybe you've already done it, but writing down where your money is going could really help.

Beyond that, check out the Consumerist, they have great advice on reducing expenses and paying down debt.
posted by paperzach at 10:22 AM on January 5, 2009

Honestly, I don't see what the problem here really is. With $150k in income and a $365k mortgage, you should be able to put together a plan of simply paying down your debt in a reasonable time frame. Unless you plan to sell your house soon (do you?), it doesn't really matter that you're upside-down on the mortgage. The best move is to hold down your job and scale back the lifestyle that got you a $14k motorcycle. An explicit budget would be helpful for figuring out where your money is going and see where you can cut back to free up more cashflow for debt reduction purposes. There's nothing wrong with paying down your debt steadily over time; the "consolidation" companies don't look like a good solution for you as you actually are able to pay down this debt.
posted by 0xFCAF at 10:23 AM on January 5, 2009

I've contacted a few debt relief companies... but they all seem to offer the same basic service.... they negotiate w/my CC co's to reduce my overall debt by approx. 40%... but only after I am 2 months late in payment (thereby in default)... This would destroy my credit (score), but reduce my debt by 40%

The reason why that works is that once you default, the creditors write off most of the value of the loan as a loss, so 60% seems like a good deal to them (it's better than nothing, at least). The problem with this, as you already know, is that if you pull this now then future creditors will be less likely to lend to you. That makes sense, if everyone could chop their debts in half with no consequences, what would be the point of lending?

There may be credit consolidation companies that can help you (that's not my area of expertise, so I genuinely don't know) but the general game plan is what others have mentioned so far. Set a budget, and spend as little as possible while you're in debt. Keep some cash in an emergency fund for unexpected expenses, and don't go further into debt. Pay the minimum payments for all of your debts, and use the rest to pay down the debt that has the highest interest rate. It sounds like you're already doing most or all of these things already, so you're probably in good shape even if you don't find a way to reduce your debt other than just paying them off.
posted by burnmp3s at 10:48 AM on January 5, 2009

I was in a smaller-scale situation than yours ~15 years ago. No late payments, but no end in sight either. I used Genus to help me out. (Though now they're called something else.) I highly recommend them. Good luck and good on you for taking control before things get ugly.
posted by killy willy at 11:06 AM on January 5, 2009

Unless you are trying to sell the house, don't worry too much about being upside down. Remember, the "value" of a home mortgage isn't just in the market price of the property. You also get a place to live. And unless you are absolutely FORCED to sell the house, don't think about selling it until it's to your benefit. Consider getting an insurance policy that covers the mortgage payments should you be out of work or disabled. I doubt it costs very much, and probably costs less than taking a loss on a house. (Also, when you think of how much debt you are in, don't count the house. One way or another, you have to pay for a place to live. A mortgage is just a different way to pay rent.)

Debt recovery firms are really just a different way to file for bankruptcy. Don't do it, it looks almost as bad on your credit report.

But you can do some of what they do on your own:

- Try to refinance one or both of the mortgages. It may not work because of the upside-down-ness, but its worth trying with 30 year fixed being so low. 6-something to 4-something is a big difference.

- Stop paying extra on the mortgage and start paying extra on the credit cards. There's no reason to pay extra on a mortgage when you have other more expensive debt out there. (Even if the CC is technically a cheaper interest rate, because you don't pay down the principal, it ends up costing more. Doubly so because most of the stuff you financed will be gone when you finally pay it off. When you pay the house off, you'll have a house.) The minimum on the credit cards is almost pure interest and almost no principal. Pay it down with whatever extra money you have each month.

- Decide what you plan on doing with the car when the lease is over. You've got two years of $711 payments to pay, and when that's done, you will either need to get a new car, or pay the residual and keep the car. So something is going to need to be done. You have, as I see it, three options:
-- Finish the lease, get a new car which most likely will have similar payments.
-- Finish the lease, finance the residual and have a few more years of similar payments.
-- Find out what the current payoff on the car is, and get an auto loan on that amount. When that's done, you have a car that's hopefully in good enough condition to use for another few years till your other debt is paid off.
-- Or, find out how much it would cost to just end the lease early- give them the car, and a payoff, and walk away. Get a newer, cheaper car. If that's not possible , find out what the payoff is, and try to get a different, cheaper car where you can do some creative financing to lump the cost of the new car and the payoff into one payment. Depending on the numbers, it might be beneficial given the cheap cost of cars now. The turn-the-car-in-and-start-over option might be better since the used car market is probably pretty poor.

- Do some figuring and reduce expenses. Especially expenses that get you nothing tangible. Like cable, movies, restaurants, travel. Pack lunches. Even just making a switch to prepackaged meals from the grocery store versus buying lunch every day will be a savings. Making no judgments, you've lived beyond your income for a while. To pay off that debt, you need to live below your means for a while. The more you sacrifice, the quicker you can get to zero. And maybe you will find that some of your current necessities really aren't.
posted by gjc at 11:08 AM on January 5, 2009

check into debt management plans or consumer credit counseling services. not the same as consolidation or debt forgiveness. the place i have looked into has not required that we be late on our payments, so i know they're out there.
posted by misanthropicsarah at 11:10 AM on January 5, 2009

$711 for a car? What's that, a Hummer? Trade that thing in and get an decked-out Civic.

Don't count on selling the bike. Not in this economy, and not for anything like you want to sell if for.

Stop buying anything but gas and food. Learn to cook. Pretend you make 80k. Pay regular payments on the mortgages, and dump the rest into the credit card with the least amount of time at teh lower rate.
posted by notsnot at 11:18 AM on January 5, 2009

The Bankrate Debt Paydown Calculator might be useful to you.
posted by Pater Aletheias at 11:22 AM on January 5, 2009 [1 favorite]

An alternate take on building an emergency fund before you pay off your debt:

1- To build such a fund, you need to divert income from paying down the debt, to cash.
2- That money sits there doing nothing, while the debt you didn't pay with it is costing you 8% every month.
3- So, in effect, you are paying 8% a month to keep that money.
4- An emergency may not happen.
5- If it does, you use the cash that you already have been paying 8% for to cover it.
6- Conclusion- building such a fund while you are in debt is a zero-sum game. Whether you use the money or not, you pay for it just the same.
7- Conclusion- until you are out of debt, use the available credit in your credit cards as a potential emergency fund. If there is no emergency, you are ahead of the game. If there is, it costs you just as much (possibly less) than if you used cash.

Once you are out of credit card debt, absolutely create such a fund. Building a pile of cash is a way to save on future interest, as long as you replenish the fund commensurately. Eventually, you can use that money to self-finance things. "Hey, we need a new roof. We can borrow the money from the bank, or we can borrow it from our emergency fund." Then, make extra monthly payments back into the fund.

(Also, regarding the credit cards, see if consolidating some of them is possible and worth it. Maybe you can transfer the balance from a higher rate to a lower rate card, and then cancel the now empty accounts. Fewer things to focus on.)
posted by gjc at 11:22 AM on January 5, 2009 [1 favorite]

Does your wife work? If not, why not?
Cut up the credit cards.
Get rid of the expensive car (there are many lease buyout websites if there's no other option)
Can you combine the mortgages and make (bi)weekly payments?
posted by blue_beetle at 11:36 AM on January 5, 2009

Debt recovery firms are really just a different way to file for bankruptcy. Don't do it, it looks almost as bad on your credit report.

This is as far from truth as something can be. The only thing that is bankruptcy is bankruptcy. [Legitimate] Counseling services are merely organizations that will provide you financial advice and act as a negotiator on your behalf with creditors. In many cases there won't even be an indication on your credit report that you did anything different than make payments as usual.

Sometimes a creditor will indicate on your report that an account was settled for less than the full amount, but that's dependent on what kind of arrangement was made. It's not necessarily clear how that affects FICO, or if it even does, since the exact method of computing FICO is a trade secret. Never the less, you don't have to enter into any agreements you don't want to.

And beyond all that, your exact FICO score should be pretty low on your list of things to worry about now. The reality of our current economic market is that - unless you have a 20% down payment you're not telling us about - you flat-out would not be able to buy a house right now if you suddenly had to move anyway. For any other form of borrowing - effectively none of which you should be doing anyway - the difference in cost of the loan is a pittance compared to the $40k you owe in unsecured debt.

The most important thing for you is going to be a change in attitude and habits from the ones that have gotten you a consumer credit debt of 1/3 your gross income and a $700+ lease. Second is getting out from under that debt. The house debt you can't do much about short of looking into some of the loan restructuring plans already passed by Congress or upcoming.

Worrying about the minutia of your credit score is pointless.
posted by phearlez at 11:47 AM on January 5, 2009

A lot of people don't like it, but I think Dave Ramsey's strategy is perfect for this. You need to make serious behavior changes when it comes to spending, and his way is the best way to do that... NOT with a debt consolidation company.
posted by PFL at 1:52 PM on January 5, 2009

I second what PFL suggested. I think you should go to your local public library and borrow Total Money Makeover. You may not be interested in everything that Ramsey has to say, but I immediately thought of the testimonials in his book when I read your post.
posted by val5a at 4:27 PM on January 5, 2009

At the risk of being canned by the moderator, I have to confess that my first thought upon reading this post is: why in the world would someone who makes $150K a year have nearly $40K of credit card debt? Like, $150K a year is not sufficient???

Good grief.

Based on the numbers the OP supplied, their housing payment is ca $2300 and their pretax income is $12,500. Presume that $8K comes home after taxes and after paying for the house (PITI) there is $5K left for everything else.

So considering only the money that's left after the house payment: $5K/month x 12 months/year = $60K, which is substantially higher than the median household income in America.

Um.

At this point, I don't believe my job is in jeopardy, I just feel I'm passively sitting on the side lines & that I could do some thing else or perhaps there's a plan out there that could drastically improve my situation or at least get me on the path to recovery faster.

I am open to all suggestions...

Unless there are some huge medical bills or a half-dozen children you haven't mentioned, I suggest you just get some perspective.

Figure out the difference between a "want" and a "need". Take a good long look at your "obligations" and act accordingly. Jesus H. Christ.
posted by Sublimity at 7:23 PM on January 5, 2009 [2 favorites]

This is as far from truth as something can be. The only thing that is bankruptcy is bankruptcy. [Legitimate] Counseling services are merely organizations that will provide you financial advice and act as a negotiator on your behalf with creditors. In many cases there won't even be an indication on your credit report that you did anything different than make payments as usual.

Sometimes a creditor will indicate on your report that an account was settled for less than the full amount, but that's dependent on what kind of arrangement was made. It's not necessarily clear how that affects FICO, or if it even does, since the exact method of computing FICO is a trade secret.

Just because FICO is a trade secret doesn't mean we don't have a pretty good idea how it works or what effect it has. And even if it doesn't affect the score as much as a true bankruptcy, if a write-down is on one's credit report, future credit will be less available. Including things like car insurance and certain employers, which take credit reports into consideration. Having a record of not paying a debt is not a good thing, no matter how it was done.

How do they make their money, these legitimate businessmen? You pay them to strongarm your creditors. Or, the government mandated that the creditors fund their operations. Either way, we all pay more in interest because they exist.

And in this case, it's unnecessary.
posted by gjc at 8:08 PM on January 5, 2009

Stop charging to your cards. You may need to charge travel, but try really hard to use cash as much as possible. Every month, pay off the month's charges, plus a chunk of the balance.

You have a great income, and you're accustomed to living well. Even a slight reduction in your expenses will make a big difference.
posted by theora55 at 7:49 AM on January 6, 2009

thank you all..... geez... alittle hard to say one of these answers are the best.

It is evident to me that my solution is a combination of all the above. of course there are some other situations that i haven't informed you about now.. but at least i have direction.

I will thoroughly investigate each suggestion above...

thanks everyone.....
posted by foodybat at 9:43 AM on January 6, 2009

"I think my credit score is around 700, but i'm not positive....I was told the only reason it's this low is my debt to income ratio... (being too high)"

Credit scores have nothing to do with income. They probably actually said or meant that your debt to available credit is high.
posted by Jacqueline at 10:57 PM on January 6, 2009