The Ultimate Question: To Bankrupt or Not?

[not_down_yet]

I noticed this forum deals with credit cards (and since my question primarily deals with credit), I thought it appropriate to post it here. I know this boarders on a tl;dr kinda’ post, but please humor me. I need to be specific with the details…

The time has come where my family and I finally put down roots and secure our future with a piece of property. Unfortunately, mistakes my wife and I’ve made in our financial past threaten this dream. We are hardworking, honest people who live within our means. I can’t say that’s always been the case. We’ve made several stupid decisions regarding credit cards and other accounts which still haunt us. We currently have ZERO involvement in the credit world now (this is by choice as we always pitch new applications that arrive in the mail), and are determined not to let our sins define us.

My plan is to save a significant down payment to help compensate for our bad credit history. Somewhere in the range of $10,000, which I’ve already begun putting up. Then we’d get an FHA insured loan. My hope is that with this type of cash on hand at signing (not to mention that FHA loans are backed by the government), I might be able to get approved for a special mortgage where another lender normally wouldn’t touch us.

I don’t want to stumble into this thing on blind faith. So I’ve compiled the bullet points of my wife and I’s Experian credit report below. If someone could take a look at the damage and let me know what they think, it would be much appreciated.


My Report/Score:

1. Date range of late/delinquent accounts showing: 2007-2015 (those in 2015 are not new accounts but agencies still trying to collect on old outstanding balances)
2. 5 delinquent credit cards/local accounts ranging from: $250-$600
3. 2 PAID credit accounts in GOOD STANDING ranging from: $200-$300
4. 1 court judgment regarding an outstanding apartment lease in the amount of: $11,515 (due to an apartment building we lived in having a bug problem they were unwilling to fix which forced us to move and break the lease)
5. My FICO Score: “Unavailable” (due to not having enough credit activity in the last six months-year)
   

Wife’s Report/Score:

1. Date range of late/delinquent accounts showing: Various periods dating back 11 years (again, none are new and most are repeats by agencies attempting to still collect)
2. 16 delinquent credit cards/local accounts ranging from: $500-$3500 (not all my wife’s fault, some of these were my doing)
3. 3 PAID credit accounts in GOOD STANDING ranging from: $200-$3,000
4. 1 court judgment regarding an outstanding apartment lease in the amount of: $11,515 (same as above due to her name also being on the lease)
5. 8 student loans broken up by the Department of Education totaling: $50,000+ (the + is not accounting for the interest and late fees that likely total $20,000 on top of this)
6. Her FICO Score: 472 (with a ranking of “Poor – Low Usage”)

There it is folks. I’ve bared our souls. I felt it necessary to do this in order to get some real answers regarding the reality our future holds. My questions are pretty typical. Should I attempt to wipe this out with bankruptcy before talking with an FHA lender (I do understand student loans are never going away), or would bankruptcy make us even more toxic to them?

Thanks to anyone who’s read this far and is willing to help!

[rennigade]

You can file for bankruptcy as many times as you want...your student loans are here to stay my friend. They never get wiped.

Apartment lease...you can settle that amount down.

Credit card debt...did you use the cards to make those purchases? If so, nut up and pay them. Why do you think its ok to get a clean slate?

You want to buy a house?? Thats the last thing you need at the moment. How much do you have saved up as an emergency fund? Im guessing zero. Yeah...you need to rent for now.

You two should probably get multiple jobs. Whether you file for bankruptcy or not...you'll still be in a massive hole. Terrible credit. Huge student loan that you will more than likely not even pay the minimum and get crushed by interest. Hope the irresponsible shopping sprees were worth it.

[Fishindude77]

Things would have to be pretty desperate, before I would ever recommend bankruptcy.
Your situation looks like one you could dig out of.

Rent and pay your bills off as quickly as you can. You can do without home ownership. What happens when the furnace pukes and you need to come up with $3000 for that? Let a landlord have those worries for now.

You mention nothing about employment or income. The two of you need to be working one or more full time jobs to generate as much income as possible, and get your bills paid off as rapidly as possible. After that, when you have accumulated some significant cash, start thinking about buying a house.

[ua_guy]

My understanding behind FHA loans is they have some relaxed requirements, mostly around down payment and credit eligibility, where lower income families might not be able to amass that kind of cash, or have less than perfect credit.

I don't think you'd get approval with very poor credit or a recent bankrupcy filing.

The others who have chimed in make a good point, however. The focus probably needs to be on digging out of your current mess, and paying off those student loans as quickly as possible.

I don't really want to comment on the morality of bankrupcy; that's neither her nor there and I think for some people it's absolutely necessary. But in your situation, I get the sense that digging out is the faster and brighter way to someday realize your dreams of home ownership--even if it's the hardest.

[JulieAlbright]

Ok wait.

So what you want to know is if you declare bankruptcy and wipe out what you can (the credit cards, the student loans will go nowhere) would you be able to then save up $10,000 or so and go get a mortgage?

Bankruptcy or no Bankruptcy, I have to think you are YEARS away from a mortgage but it is a great goal to want to improve your financial life and I encourage you to think long term. I think the minimum credit score for FHA is in the high 500's somewhere and a just happened bankruptcy isn't going to make that 472 look any better.

It might be worthwhile to consult with somebody to see if some of the older unpaid amounts can be taken off your reports as uncollectible due to age, and it might be worthwhile to start negotiating with some of the creditors to see if they will settle for reduced amounts in return for marking accounts as paid. I'm not really any sort of expert in that sort of thing.

But I have to think the best thing you can do is hunker down, cut your budget, and start making on time payments. Nothing improves a credit score faster than paying what you owe before the due dates.

[disneysteve]

Let's approach this a little differently.

1. How much do you earn - total household income?

2. How much do you owe - total household debt?

3. How much do you have in savings?

4. What are your current monthly expenses?

Whether or not you are bankrupt really depends on your ability to repay your debts. You haven't provided any info to answer that question.

[dczech09]

One thing that concerns me is that you say that you don't want to be defined by your sins, yet you are contemplating doing something akin to your sins of the past (borrowing irresponsibly). I hope you understand what I am getting at

I echo the others: no you should NOT go for a mortgage! Yes, FHA has lighter qualification requirements, but you will not get approved. FHA looks for a credit score of 580 or higher for qualification (500 to 579 if you have no more than 90% LTV at signing). You are not there and you have many derogatory remarks on your credit reports that will stop any mortgage application in its tracks.

There is nothing wrong with renting. Absolutely nothing wrong with it at all. I rent and will continue to rent until I can buy a house with cash. Am I saying you should do the same thing? No. But I am just trying to raise a point: do not rush into home ownership.

Are you bankrupt? Without knowing your income and savings situation, I cannot say for sure. However, bankruptcy is usually only recommended for the most dire of situations.

Student loans can be discharged in bankruptcy, but it is VERY difficult. Usually you have to meet the definition of total financial hardship (trust me, you don't want to be there). Also, a lot of courts use The Brunner Test as a guide to whether or not student loan bankruptcy is justfied. One of the items in The Brunner Test is that you have been making good faith attempts on your loans.

It looks like you are behind on your student loans. Are you in default? If you are in default, you can kiss good-bye any possibilities of deferment, hardship deferral, income-driven repayment, or bankruptcy. You really have no choice but to work your way out.

About the only thing you can file bankruptcy on is your credit cards and your judgment. I am guessing you have somewhere around $30k or $40k in credit card debt? Depending on your income and savings, it may not make sense to file.

Even if you do file, it does not fix anything. You still have a lot of student loan debt to clean up. Also, filing won't change those derogatory remarks on your credit report. Those remarks will be there for a while (7 years after last activity on the account).

Filing bankruptcy will add a whole new black mark on your credit report and will bar you from home ownership for several years. So it is not like you can file bankruptcy today, get everything cleared, then take out a mortgage tomorrow. It does not work that way. Bankrupcty is a rough path for people accustomed to a life of credit cards.

I hate to say it, but you are in a HUGE mess! You need to get FIRED UP! You and your spouse need to understand how bad this is. You both need to get FIRED UP and get into attack mode because that is your only way out! You need to fight this garbage! Work obscene hours. Work multiple jobs. Get some side income going. Do whatever it takes to win!

Set aside about $1,000 to $3,000 for emergencies. You need a small emergency fund to prevent future emergencies from becoming new debt.

You need to stop borrowing. I hope you have cut up ANY AND ALL credit cards! You and your wife cannot have a credit card available. If you do, you won't get out of this hole.

Try to workout a deal with your apartment judgment. See if you can get on a payment plan, and/or reduce the amount owed.

Depending on your income and savings, you may be able to consider settling your credit cards. However, this is only recommended if you literally cannot pay them off (if it is a mathematic impossibility).

Your priority order of paying off your debts should be...
1) The apartment judgment
2) Delinquent credit cards
3) Good standing credit cards
4) Student loans

You need to get to a point where you can become caught up. Once caught up, you need to make minimum payments on all debts and then focus any extra money on your priority.

[snafu]

In my opinion you and DW are in jeopardy and not aware of the danger. Employers are looking at credit reports when they consider who to hire, who to promote, who to get additional hours [over-time], who to release and who to fire. Insurance companies look at credit report when they work out premiums for life insurance, vehicle insurance, etc. Nearly everything is getting examined. You will pay more for your car insurance, you will pay more for damage deposit, and your job may be in jeopardy if the economy takes a dip. Your or wife may be the best candidate for a promotion but you will likely be passed over because of that credit score.

Only you can take action. 1st figure out exactly how much you need for basic expenses. Imagine yourselves unemployed, what basic expenses must be covered? [rent, utilities, food, transportation,insurance, any loan]. Set that basic sum aside in a no fee savings account covering 3 months as your emergency fund]. Find out the KBB value of any vehicles you have. Are they worth less than what you owe? Are you underwater? When did you last review your vehicle insurance? Is it appropriate to value? Do you know your insurance will only cover the KBB value? And only reluctantly with a big argument. It will not cover what you owe, Ask your insurance broker to send it for bid to see if you can get a lower rate with correct coverage. How much is deductible? If you will add $ 1K to your emergency fund, you can increase deductible to $ 1K. Whatever the deductible, that sum must be available in your EF.

It's time to look at your bank charges. Each are likely small amounts but cumulatively, they are often a surprised. Whatever your last statement read, multiply by 4 to approximate start of 2015. Multiply by 12 for an idea of annual cost. It is usually more cost efficient to do banking via Credit Union but your low credit score may make you ineligible. The downside of Credit Union is their limited ATM access. Using non affiliated ATM machines is expensive unless you can limit yourself to one withdrawal each pay period.

...sorry, so long...

[feh]

Y
You want to buy a house?? Thats the last thing you need at the moment. How much do you have saved up as an emergency fund? Im guessing zero. Yeah...you need to rent for now.

+1

OP - you are a long way from being ready to take on a mortgage. First order of business is to learn to live within a budget and start saving.

[rennigade]

not_down_yet...a couple people have now replied. What are your thoughts? DisneySteve asked a couple good questions. Please feel free to let us know so others can help you form a plan.

[rennigade]

Well played OP...well played. 4 days and no response.

There needs to be some sort of policy put into place that anyone with less than 10 posts cannot start a new thread. This would eliminate these 1 hit wonders.

[disneysteve]

Well played OP...well played. 4 days and no response.

There needs to be some sort of policy put into place that anyone with less than 10 posts cannot start a new thread. This would eliminate these 1 hit wonders.

Interesting suggestion. On the flip side, though, many people find this forum when they are searching for a solution to a specific problem. To say that they must be active participants for some period of time before they can ask the question doesn't seem very user friendly. I think that would turn most people away.

[rennigade]

Interesting suggestion. On the flip side, though, many people find this forum when they are searching for a solution to a specific problem. To say that they must be active participants for some period of time before they can ask the question doesn't seem very user friendly. I think that would turn most people away.

I frequent another forum bodybuilding.com that doesnt allow you to post links or pictures until you reach 50 posts. You can however start new threads right off the bat. I was sort of thinking out loud when I posted that. Not being able to start new threads right away would eliminate spam posts but would also make it difficult for others like you pointed out.

[disneysteve]

I frequent another forum bodybuilding.com that doesnt allow you to post links or pictures until you reach 50 posts.

FYI This site doesn't allow links until you have 15 posts.