Bad situation Advice. Please help!

[Anonymous]

Hello.  I am 31 years of age married with 2 kids.  I am going through hell right now to fix my finacial and credit problems.  Any advice would be helpfull.

Situation:  

• 2 Years ago, I was audited by the IRS for some 30k ( 2 years).  During the time of filing the the tax return, my cpa messed up my tax returns some how.  He ended up leaving the country for some reason along with all my expense receipts and documents.   
• I Hired a tax lawyer and paid 4k to help resolve the issue.  During the 2 years, he says he is still working on the case but moving slow.
• Last Oct 2008, I recieved a letter from the IRS for notice of lien of 50k.
• On top of that, I have credit card balances totalling 25k.
• On top of that, last Feb08... I got my wage garnished (over $1000 a month) from a default in my student loan.  This was a shock to me at first since i thought i the payments were getting paid.  Soon came to realize that my wife stopped paying for it.  She like many other women had major major post depression after our second child.  The original balance of the student load was around $21,000.  Since Feb, they have garnished $15k this year.  I still owe about $7k.

Now, I am on a mission to fix all of this.  Here are some data points.

• I make $120k a year.  
• I live in Texas
• My wife doesnt work.  
• We bought our house  back in Jan 2002 for $220,000 at 5.75 fixed 30 years
• We owe 180,000 on the house
• Value of the home is roughly 300-310k (based on Wells fargo Loan officer before officail appraisal)
• My current credit is 580 (how sad is that)

I talked to someone at a bank about a home equity loan or something to help me consolidate this debt.  They did a credit report and found that my credit was pretty low.  They came back with a 40 year loan fixed for 12percent. This would allow them to pay off all the debt including IRS,student loans, and creditcards.  The monthy payment would be $2500 a month.

It seems like I have no choice here but to go thru with it.  What my plan was, is to follow through for 2 years.  Don't use any more credit cards but only cash.  Hopefully build up my credit in 2 years back to where it was in the mid to high 700s.  Then refinance again with better credit or even moving to a smaller home using whatever equity I have in the current house as down payment for a smaller home. (130k-160k).

My questions are to the experts on this forum.

1. Is this a wise decision to refinance at this high of interest rate? 
2. What other options do I have?
3. Assuming that the debt is paid off early in 2009 and i dont miss any payments, how long does it usually take to rebuild my 580 credit back to 750+.?

Thankyou for responding and giving any advice over this matter.  This is a tough time for me since the kids are still young and my wife is still in major depression.  I have to make this work somehow.  I don't mind working my butt off and sufferring as long as I can provide a stable future for my family.  As most of you already know... these are tough economic times but one thing I have is my job.

Thanks! 

[Anonymous]

While I don't think I qualify to answer all of your questions I do know that changing that sweet deal you have on your home would be a HUGE mistake!!! Minus the credit scores, a mortgage of $220,000 at 5.75 fixed 30 year on a home worth 300k is a goal of most folks here.  Seek other solutions.  I made the HUGE mistake of refinancing my sweet deal and am now paying for it big time...   Making as much as you do, surely you can seek other solutions as I should have.   I am also in your age range, 2 kids, large home, make over 100k but can't help but envy your mortgage situation...  Write letters galore - think and sleep Good Will (GW) letters starting tonight.  You can get yourself back in order without sacrificing your awesome home situation - I'm sure of it......

PS - Because you already have a decent nest egg (300k-180k = 120k in clear asset) you are not as bad off as you think you are.  Don't give your 120k away to a nice looking refi. deal...

Message Edited by TheAten on 12-23-2008 03:52 PM

[PayYouNever]

NiceGuy,

Here are my suggestions-- do whatever you can to eliminate the IRS tax lien. What you need to do with this is find out exactly how much you owe, and then make then like a 75 to 80% and that the remove the lien completely from credit report listings as soon as they receive the certifed check. A Tax lien easily brings your FICO down 50 to 80 points.

Depending on what you CC utlization is, that is how much available credit you have, you need to work on bringing that UTL down to 1 to 9% of the overall credit line.

These two things will get your score into the mid to high 600s -- probably two months after you achieve both goals. But get rid of the lien first, negotiate it off at any cost. 

Some might say that zeroing out your CC debt is the best means for bringing up your score, and it probably is -- because it might take you a while to figure out how to remove the lien. 

I don't know how you get paid, but maybe you could set up a LLC and then have your wages paid to the LLC with the LLC's tax ID. This could skip out on then Student Loan garnishment, but maybe not.