Cash Out Refinance Loan - Life Has Changed - Advice?

[CaptainConcorde]

I haven't posted here in years and my situation has changed over the last two years. Last January I had to retire at age 54 due to worsening PTSD symptoms. My only income now is VA disability (100%) $3145 a month and SSDI $2275 a month or $5420 a month. My current bills are about $300 a month over my income with a mortgage of $2150 a month on a retirement community home in CA. I am happy living here and my mental health has stabilized somewhat after moving here.  My current mortgage is a VA loan and I'd be doing a VA cash out refinance.

I have two large unsecured personal loans for $740 and $540 a month and about $35k in credit card debt ($420 a month minimums). I'm upside down about $600 a month total after everything else is added in. I'm looking at a mortgage refinance cash out loan. My home has around $80k in equity and I have about $20k in cash on hand.

The refinance cash out would bring my mortgage payment to $2800 a month but would allow me to payoff both personal loans and two credit cards. The end result would be a positive of $800 a month in bills which would take all the pressure off me. The interest rate I'm being quoted is 3.99% with a 100% value loan. The monthly payments are managable then and I'd no longer be negative each month. My DTI would be around 53% which is doable with them (but still high). The mortgage company steps up the income by 25% since VA and SSDI are non-taxed.

It looks like the COLA next year for VA and SSDI will be at least 4.5% so my new take home would be around $5600 a month. While I won't be living it up I'd be OK then financially. The high interest rate on the mortgage is a concern (I'm currently at 2.5%) but given it's a 100% of value loan I understand it.

Does anyone have any suggestions as to alternatives? I don't see myself being able to make it with the high interest personal loans I have and with 5-6 years to pay them off I don't have cash reserves to make it the duration. A cash out refinance is about the only thing that would help me. Moving again isn't an option.  I moved here to help my health and it's been a good decision.  While I knew it would be a burden financially I didn't realize how much it would affect my budgeting.  

My current FICO 8 scores are EQ 728, TU 729, EX 718.  My credit utilization is around 15% although it's all on two cards.  My total credit limits on all cards is over $250k.  My only other monthly bill is a $500 car payment.  Student loans were forgiven when I became disabled.  I had a BK around 19 years ago and have rebuilt nicely since then.  My scores were close to 800 before buying the house but I've had a lot of inquiries since then and the high utilization on the two cards has hurt me.

[krielly]

There is no way I would ever turn that much unsecured debt into secured debt.

Bankruptcy may be your best option. Not an attorney, however if you simply stopped paying on your unsecured debt, my guess would be that you are judgement proof due to your income sources.

Don't let concerns about your credit scores lead you to a huge financial mistake.

Others will chime in, but I think that unloading that unsecured debt in a BK will take a tremendous weight off from your shoulders. You may be retired, but are definitely young enough you should have plenty of time to rebuild afterwards.

K

[Harvey26]

@CaptainConcorde First off I am glad your mental health is doing a better and your in a great place! I would certainly take look at the cash out refinance option is any of your debt able to be paid off with your savings because that can always be rebulit? Are any of your cards offering balance transfers? Maybe even look at possibly selling and moving into something a bit cheaper for the time being like an apartment or buying a less expensive home. Maybe even a part time job just to help out for now until you can get things down a bit. But by NO MEANS should you file BK do not destroy your credit when you have avenues that could help. If it were me I would take 15K and pay towards credit card debt to bring that down and then cash out refinance and just include the personal loans and then everything else should be manageable for you to be able to get paid off yourself and then your not 100% financing. 

[jmw1]

Most people wait too long to file bankruptcy. It sounds like you waited too long on the sidelines to consider bankruptcy. I'm voting for bankruptcy here. 

You will be giving away all $80k of equity to your unsecured creditors in this transaction. That's a horrible outcome that is completely unnecessary. It's your money and you should be able to keep almost all of it.  And there is the possiblilty there will be an appraisal gap so you won't be able to finance all $80k of it.

Talk to a *good* bankruptcy attorney. All of them will give you an initial consultation for free. You need a good one due to the real estate and the $20k cash.  If you are in the LA/OC/IE area, I would refer you to one with the initials MM. 

You will need to work with your bankruptcy lawyer to spend down most of the $20k in cash. There are a lot of legitimate ways to spend it down like a single year's worth of tax deductible IRA contribution, medical procedures, buying replacement appliances/HVAC/etc. and a $5k junker car to replace the financed car.

At the end of the C7, you will have the current mortgage payment and that's it (assuming you surrender the car and buy a $5k beater).  You can cram down the auto loan sometimes but talk to the bankruptcy lawyer about that vs. spending down the $20k.

Finally, you do a rate and term VA refi two years after the chapter 7 and get that payment down as low as possible.

[OmarR]

I echo NOT trading unsecured debt for secured debt. Especially if you just end up running your credit cards up again and taking out more personal loans. Than you'll be in much worse trouble than you are now. 

If it were me, I'd get rid of the car, even if i was upside down on it, and buy a beater. Especially if i was retired and not working. You said you were short $600 every month and your car payment is $500. Get rid of it and pay off the difference. It's not worth it. It's only a car. 

I'd also super budget. I wouldn't see the inside of a restaurant (or other places) unless i was working there. 

[CaptainConcorde]

I've considered filing for BK but I'd still have to use my former states exemptions which is a problem.  You have to live in CA for 730 days before filing to use CA exemptions (two years).  While CA exemption for equity in a home is $600k in my former state it's only $60k.  I'm not planning to move again as my health has stabilized living here (who needs the stress of another move).  My former states BK exemptions are horrible, about the worst in the country.  

The high debt load I'm currently carrying isn't due to spending issues for the most part (a lot of medical prior to becoming disabled and some other debts related to an inherited house that needed repairs to sell).  I'm not concerned with running up more debt after refinancing as my budgeting is good.

I don't see how I can file BK at this time.  I could "string along" everything for another two years, use savings money to suppliment things until I hit the two year mark, then file for CA BK.  That's one option I'm considering.   I had a BK in 2000 (was an independent trucker - business failure) and rebuilt in about there years afterwards so rebuilding isn't that scary a prospect as I know how to do it.