I am going start with the disclaimer: Yes I realize the mistakes I have made to get to this point.
As a results of a departure from a job and lifestyle I did not enjoy, and things "not going as well as forecasted" in my early 20s it appears I have accumulated a large debt on a credit card of mine. The minimum payments are manageable, however don't really get me anywhere, too large of payments are over extending myself since I do have other financial obligations.These obligations are normal ones are in mostly good standing but don't occasionally get way sided by this larger debt I am desperately trying to pay . It's already had a pretty negative impact on my credit. Basically any financial goal I set - business loans, business credit, getting a house, saving up some good cash and paying off any other bills seems to be hampered by this account.
Now I know settlement is not the same for everyone and credit companies don't offer to everyone, but does anyone have experience or insight on this? Take one big hit so I can stop overextending myself, fulfill my other financial obligations, be free of it, and let my other accounts pull my score back up? What terms should be avoided at all cost? OR just suck it up, tighten the bit a little more for a little longer?
Negotiating a debt or even bankruptcy isn't charity and it's not immoral. It's business and it's legal for a good reason. Hell, forgiving debt even has biblical support. In ancient times when a new ruler took over it was common practice that all debts were forgiven. Just look up jubilee debt cancellation.
I too made some financial mistakes in my past...
Without knowing the details (nor do I want them) of your finances it's hard to point you in a specific, calculated direction. I would start with just paying the basics first and foremost...Mortgage/Rent, food, lights, gas. After those, see what you have left. Write out a budget. Attack the smallest debts first (forget interest rates) just hit the smallest card first. Get an additional job! Attack the debt as if your life depended on it.
I did this once to get out of my hole. When that first card drops to zero and gets cancelled you feel so empowered, the second comes a bit faster, the next, etc. Haggling these amounts down won't give you that same transformative sense of control.
If you settle, get it in writing first and don't ever give them access to your bank account.
I'm curious about paying a mortgage before unsecured consumer debt. It seems contrary to your Ramsey-esque snowball plan. Is the mortgage analogous to a minimum payment on bigger debts? Do you see the mortgage as a necessary expense, because it represents housing (which I agree is a necessary expense)? Do you think that the foreclosure process is as quick as the eviction process?
My favorite book on personal finance, "Pound Foolish" by Olen, tells about someone who was able to get her life back together - pay off her credit cards, get a stable housing and job situation - by not paying her mortgage. Sure, eventually the bank came after the house, but by then she had some savings and lower bills; and she got plenty of warning.
Also, "food, lights, gas" as "basics" is a matter of degree. You can always spend more on food. You can always spend less. Do utilities include air conditioning? At what setting?
Mortgage, in that case, is a household budgetary expense, not a debt repayment. That's consistent with Ramsey. Don't pay off your mortgage before you pay off credit cards. But, definitely don't get kicked out of your house because you're making credit card payments instead of paying your mortgage.
I think you're confusing the budget with the debt snowball. The order of priority of budget expenditures is not the same as for paying off debts.
I suppose you would consider foreclosure in single-recourse states where the bank takes a hit forced charity. I suppose it's forced charity to you even if the bank doesn't take a hit. [Even if the bank lied to its investors, the feds, and the owner/applicant/debtor about the loan application?] So, getting kicked out isn't an option for you, even if it's the best thing for one's finances and lifestyle.
That doesn't explain why the mortgage is a budgetary expense and not a debt.
Because its a monthly payment to keep the roof over your head, not just debt service. From a household budget perspective, no different than rent.
Supposition doesn't do anybody much good. Secured debt is somewhat different than unsecured. Pay, or lose the collateral and take a beating that'll follow you the next time you try to buy. You'll pay one way or another. But, if it has to be done, it has to be done. No wrong in it.
I can't figure why you'd intentionally get yourself kicked out of your house if you can make the payments. If you can, you still should. Buyers remorse doesn't strike me as much of an excuse. They over-loaned. You over-borrowed. Neither particularly deserves the hit more than the other. Pay it back if you can. Lousy investments happen. Re-negotiate if necessary, and its an option to distribute the impact of both you and the bank undercollateralizing. Foreclosure if you must.
I don't know that I ever used the term "forced charity".
On a practical level, people stop paying mortgages years before the banks finally foreclose and evict them. It's a lot different from renting that way. Also, the credit hit of a foreclosure may be bigger than a settlement of unsecured debt, but you're taking a hit with both. A difference for those opposed to use of unsecured credit is you'll never want unsecured credit again, but almost everyone is ok with mortgages for primary residences, so there's a practicality to how one's attitudes about paying the debts play out.
Buyer's remorse may not be an excuse, but the financial incentives are clear. You've got a property you're under-water on. If you sell it for the present market value, the bank can still come after you for the difference. If you let the bank foreclose in a single-recourse state, the bank can't.
In Olen's example, the owner couldn't service both the credit cards and the mortgage. I don't know what bankruptcy would have done for her, but by not paying the mortgage, the credit card companies probably got more than they would have in bankruptcy, and the mortgage lender probably got about the same.
JB, you've compared debt settlement to charity. In bankruptcy and foreclosure, the debtor uses the courts to force creditors to accept less than if the loan contracts were carried out to the letter. Thus, forced charity.
Bankruptcy is different in every state, so it's hard to generalize. I strongly suggest that anyone in such a situation go for a free consultation with a few different local attorneys who specialize in bankruptcy. That's the only way an informed decision can be made and each case is different. Bankruptcy law is arcane and doesn't always follow logic. It takes a personal knowledge of the judges, trustees and accountants in the sate and how they are likely to act. I've been through three chapters and it's like brain salad surgery even to other attorneys who don't practice this specialty.
I'm not suggesting bankruptcy to anyone, but these attorneys can tell you from experience what is likely to happen better than anyone and they can help you make a plan of action with or without legal help. The one thing I know for sure is that once you are behind on a mortgage and credit cards, your credit score won't be any worse off if you file for bankruptcy than if you manage to catch up. The recovery to the score will still take years. Also, any settlement you make can result in a 1099 which you will owe tax on and you cannot get out of paying income tax or fines even in a chapter 7.
Why does bankruptcy vary state-to-state? Just the jurists involved? Are state homestead laws part of the law governing b/k proceedings? Obviously, b/k is a matter of federal statute and case law.
Federal law establishes basics, but each state gets to add to it, and those who execute the laws have wide latitude, so you need to know the players. There are no jurists. The rights of spouses are different state by state as well as which assets you're allowed to keep.
IMHO, here's what tends to happen. Person finally starts making a few bucks, and the just can't wait to get more goodies. Plastic was too easy to get, so folks get a couple (or more cards) "just in case", use card, overspend, use another card, and it's off to the races.
The old rules of thumb were that an honorable man paid his debts, and a provident man made some provision for the future.
I think everything started to go totally awry during the period between the Arab oil embargo (OMG, gas went from 36 cents/gallon to 75 cents/gallon!) and the Savings & Loan crisis in the early Reagan years. That's when mortgage interest and credit card interest rates were both around 20% in places.
Bottom line, pay what you owe. Credit problems are almost always your own fault because you wanted too many too fancy toys.
And for that, I'm "Been there, done that."