Looking for some good financial advice.

[gml120]

My husband and I were discharged chap 7 in October 2010. I have cleaned up my credit since and have a pretty good credit score, considering. He has also settled a defaulted student loan last year and has a score lower than mine, but still pretty good. We are living paycheck to paycheck, renting an apartment that we hate, and have one good car and one problem car, both paid off. We really want to purchase a house very very soon and I have figured out that the mortgage + pmi for fha payments + taxes in a reasonable home would be approximately the same as they are now for us. Here is the elephant on my shoulders - the husband has a private student loan from Discover in the amount of $55k. The monthly payment is a ridiculous $475 and that is ONLY interest. The balance has not gone down in years. Here's another twist. The cosigner of this loan is my husband's father and he has been very generous in helping us make that payment every month since the bankruptcy and the loan has been delinquent but never defaulted. Some background on his father: He has a house with a primary (paid off within 6 months) and a secondary mortgage currently. The property is worth about $70k and the amount owed on the secondary is about $35k. He has a very small retirement savings of $25k, no credit card debt (but has one card with $10k available in credit), and one older car with no lien.
My question is: Is there a clever way to handle this huge loan? Can we let it default and wait for a judgement and then discharge the judgement? We live in PA and there is no wage garnishment here, but they can put a lien on property, but what if the property is worth less than the loan? The father's income is very low and he pretty much is laid off half the year, every year. He is also of the opinion to "just keep paying what they want" every month no matter what but I'm very scared that it's not worth it because the principal NEVER goes down. I'm looking for a smarter solution if there is one. I am desperate to get away from the drug dealers next door and get my 3 year old into a home with a yard but also scared to death that this loan will eventually cause us to lose the home when his father decides he doesn't want to help anymore. I guess what I'm saying is that I feel financially frozen right now and for the last year over this and need some advice so I don't make a huge mistake. Thanks.

[HHM]

With a BK in 2010, I am not sure what you intend or mean by "discharge the judgment". In any event, no, you can't. A student loan is still a student loan even if they get a judgment. So, in that respect, there is no work-around.

When does the student loan balloon or when does it switch to P&I payments.

I don't think the student loan will be an obstacle to getting a mortgage if that is the goal, it doesn't help, but if that is your ONLY other debt and the "required" payment is the $475, I really don't see why you couldn't get a mortgage (assuming you can afford the payment, have a down payment, and some reserves).

Right now, until there is legislative change, cosigners and student loans are very problematic. If you default, they go after dad. If dad doesn't pay, they sue (maybe). It is a high risk gamble.

[bcohen]

Right now, until there is legislative change, cosigners and student loans are very problematic. If you default, they go after dad. If dad doesn't pay, they sue (maybe). It is a high risk gamble.

There's no "gamble". It's an absolute certainty. Discover Bank will sue if the loan defaults. They will probably go after the co-signer too.

If Discover sued me for a credit card that originally had a $3,000 limit (now ballooned to more than $6k) and I am an unemployed full-time student with nothing to my name, you can be sure they'll sue you and your co-signer in double-quick time! After all, your co-signer owns a house which they can slap a lien on, and the collection law firm knows with absolute certainty that a student loan judgment will eventually be paid one way or another, because you can't discharge it in bankruptcy. A collection law firm suing on a credit card debt doesn't have that assurance--in fact, I am about to BK my judgment from Discover Bank, which means that the attorneys won't get diddly squat!

[gml120]

Thanks for the replies. The loan switches to P&I in 2 years. In reality, I'm not as concerned as to whether they will sue or not, I know they will. Would it be a better idea to buy a house before a suit? I'm assuming that getting a mortgage after a judgement would be nearly impossible in any reasonable length of time. As of right now we would have no difficulty in getting a mortgage, our other debts are only mine in the form of a govt student loan and a relatively small private loan. Our biggest actual expense right now is my husband's 120 mile a day round trip to work. Gas & crap cars are costing us a fortune. We can't afford to live closer to his work and he can't seem to find a good paying job closer to here. We would just barely be able to afford the new home and still live paycheck to paycheck and have no savings or retirement just like it is now. I am fairly certain that if the father finds out that we bought a house, he would assume that since we have enough money to do that, we have enough money for this loan and quit paying it out of spite. He has said in the past that he really doesn't care if it defaults as long as he doesn't have to pay towards it anymore. He also doesn't seem to be able to understand the penalty of default as it pertains to his property. Although I'm appreciative of his help so far, my main concern is for my son. I don't want to move into a home and then get sued out of it because of this. Also because of my husband having the larger income, it's not possible for me to qualify for a mortgage on my own.

So really what I'm asking is, what is the worst-case scenario if we buy a home and the loan defaults and all of us get sued? Can they require us to sell the house? (It will be a 95% financed purchase). I can deal with a second lien but not being homeless.

[bcohen]

You live in PA, which is a very debtor-unfriendly state (although the one positive thing is that they don't allow wage garnishment). There is no homestead exemption, so a judgment lien on a house that you might buy cannot be avoided, discharged, or set aside in a future bankruptcy, and most likely the lienholder could foreclose once you have enough equity.

In other words, if you buy a house today, initially you will have very little equity. If you are later sued for defaulting on the student loan, you would probably still have too little equity for the judgment lienholder (Discover Bank) to foreclose, because they'd have to pay off the mortgage in full to get clear title. But eventually, when you have paid down the mortgage enough, suddenly Discover Bank would attempt to foreclose its lien, and since there is no homestead exemption in PA, they could sell the house, pay off the remaining mortgage balance, and leave you out in the cold, literally.

On the other hand, if you do not buy a house, but instead rent, and you do not keep more than you can afford to lose in the bank, Discover Bank can basically take their judgment and shove it, as far as you are concerned, because they cannot garnish wages in PA. However, they can still go after your co-signer's house, and retirement savings. That is the problem here, and unfortunately, I do not have a solution, other than to keep throwing money down this black hole.

[HHM]

gml120, your assumption is pretty much correct, if there is a large judgment out there, that will kill a mortgage. Unless, you can qualify for a mortgage without claiming your husbands income.

I really can't speak to PA law and the risks associated with the home. If you were to get a mortgage now, I suspect you are not putting a ton of money down (probably the 3.5% minimum), so there will be limited equity (at least initially). Also, the mortgage against the house still takes priority over a judgment lien. Generally, if a junior lien goes to foreclose, they don't get possession. Someone would still need to buy out the mortgage before they could actually kick you out of the house.

[TheBajan]

So really what I'm asking is, what is the worst-case scenario if we buy a home and the loan defaults and all of us get sued? Can they require us to sell the house? (It will be a 95% financed purchase). I can deal with a second lien but not being homeless.

The worst case scenario is the ruined relationship between your husband and his father.

From a purely financial perspective, BASED ON WHAT YOU ARE SAYING, you really are not in any position to buy a house. You have no savings. You live paycheck to paycheck. You know you can't pay this loan and you suspect that if you buy a house, your obligation to pay it will be put into effect.

I hear your frustration about your living arrangements. Yes, you should move. No, you should not buy. No, you won't be able to rent the "perfect" house, but you will be able to rent something safer than where you are. The American dream of owning a house will become your American nightmare. Costs have to be factored in that you are not thinking about. Costs that you don't have when you are a tenant. Commitments that you don't have when you are a tenant.

Don't do this. It's a bad idea and I think you already know that.

My best wishes to you.
The Bajan

[gml120]

Is it possible that we would be exempt from property lien due to TBE:
"The practical consequence of a tenancy by the entireties is that the debts and judgments against one spouse cannot affect property held by the entireties. To the extent that all of a judgment debtor’s property of value is held with the judgment debtor’s spouse, it is shielded from execution".

I read this as since we will both be equal owners on the deed that a judgement cannot be placed on it since it is only able to be levied against one spouse.

Yes, the worst cast scenario would be a ruined relationship between father and son, but we're basically there already after years of fighting about this loan.

[pamkev]

I have a question about this which is almost the same but coming from the co-signers point of view. I co signed for my daughters students loan just me not my hubby. She has been making the payments on time and hopefully I will be able to get my name off the loan in around a year.
What happens if she stops and for some reason I can't make the payments being in Pa they can't do wage attachments and our home is only titled in my hubby's name as it was his before we got married can they still put a lien on the home?

Pam

[btbeme]

gml120, your assumption is pretty much correct, if there is a large judgment out there, that will kill a mortgage. Unless, you can qualify for a mortgage without claiming your husbands income.

The original post seems to show that the student loan is in arrears...is that correct? If so, that will shoot down any mortgage application. And if the mortgage company gets wind of "someone else" paying the loan for affordability reasons, same thing.

3 years out of BK means the bank will go through everything with an extremely fine-toothed comb. So, look to see if you might qualify without your husband on the loan.

[HHM]

Is it possible that we would be exempt from property lien due to TBE:
"The practical consequence of a tenancy by the entireties is that the debts and judgments against one spouse cannot affect property held by the entireties. To the extent that all of a judgment debtor’s property of value is held with the judgment debtor’s spouse, it is shielded from execution".

I read this as since we will both be equal owners on the deed that a judgement cannot be placed on it since it is only able to be levied against one spouse.

Yes, the worst cast scenario would be a ruined relationship between father and son, but we're basically there already after years of fighting about this loan.

The deed needs to actually say Tenants by Entirety.

[Drazil65]

Hi, I have to agree with one of the previous posters, you cannot afford to buy a house. Its the reality of your situation as you explain it. Take a step back and really look hard at your situation. You are not paying on this student loan because you cannot obviously afford it. Yes the amount is ridicules for interest only but thoses were the terms you signed on for. Looking for a new place to rent should be first on your agenda I have to say. Don't put yourselves into further financial trouble by taking on a mortgage and all the home issues that can come up. You cannot walk away from a broken hot water heater or furnace when you own the home, you have to get it fixed. If you do not have a little in savings for an emergency right from the beginning you are setting yourself up for issues right from the start.

Seriously if you want to get things on the right track your focus might be on getting a new place to rent in a safer area (perhaps closer to your husbands job) and then taking over the payments once again on the student loan. From what you are describing your father in law is really not in any position to continue this financial burden as his financial life is not great and is probably getting near retirement and such. I am sorry but I do not get the feeling that you feel bad about your father in law making these huge payments for you and it seems like you almost expect him to do it becasue he has the most to lose. Sorry I do not mean to sound harsh I am giving you my perspective on how I am reading this. You have to figure out a better way to handle your finances BEFORE you buy a house and take a good hard look at bringing in more more (second jobs maybe? we have all been there and you do what you need to do until its better). Good Luck!

[gml120]

Drazil - Honestly, I used to feel very bad about this. However this particular man is not the saint you are painting him as. He has consistently accused me of "ruining his son's life" by getting pregnant by him. Even though I waited and worked hard with multiple jobs until I was 34 to even consider having a child - even having an abortion when he got me pregnant at 28 because we didn't have the money. I didn't have a wedding or a honeymoon or any other trip for that matter. At this point, I have been laid off from my job because I've had to miss too much work due to doctor's appointments and was just diagnosed with a brain tumor. My son's grandfather has never seen his grandson not even once since he was born 3 years ago and says it's because that we don't have a big enough apartment since he lives far enough away that he would have to spend at least one night and all I can offer him is either the couch or my bed.
I know it's logical to assume that all we do is live beyond our means and all that's needed is a simple second job or "cutting back on luxuries" to make a difference but it's not like that in our case. It's actually not an option to move closer to his work - it's in a rich area where there isn't anything in our price range to rent. If you want to know hard numbers we pay $500 in rent now and the cheapest place I've found after looking for years has been in the $850 range. The biggest reason I'm looking to buy here is because there are 12 homes for sale right now with a similar mortgage payment.
I guess I'm just maximum frustrated at the whole thing mostly because this dump we rent is costing us around $450 a month in heating oil because it's so uninsulated and there's nothing I can do about that and the landlord doesn't care. That's where all our meager savings go, and of course the $400 a month in gas. In fact, the job I just lost wasn't even that profitable because 80% of my income just went to daycare. My husband is gone for 13 hours a day which puts it all on me to take care of everything. I'm actually considering just getting a divorce to separate myself from this loan because we fight over it constantly. He wants to just take over full payments and sell my car and move into a studio apartment that's cheaper by $100 a month but there's no way I'd be able to get myself or son to the doctor then since this stupid town has no public transportation whatsoever. Both him and his dad don't feel like much action is required to take care of paying this and they won't listen to me about how bad it would be if there is a default. What's a woman to do?

[momofthree]

When looking at renting closer to his job, take the gasoline savings into account, as well as the savings in heating. For example, right now you are paying $500/mo rent, $450/mo heating oil, and $400/mo gas to get to work for a total of $1350/mo. If you move to that $850/mo rent, but it means that your heat is cut in half, and your gas is cut way down, you may end up SAVING money each month, plus you're in a better area, hubby has less commute time (more time with family), and everyone's happy.

Also, and this is what I had to do when the economy went south and I had THREE preschool aged children: Work at a daycare. I was allowed to bring my children for free, so I could actually earn an income. Some centers don't let you bring your kids free, but nearly all offer a steep discount for their employees. Believe me, I'm not a big fan of other people's children, so I get that it may not be a desirable job, but when it comes down to it, you do what you gotta do. My last baby is finally starting kindergarten in the fall, and it has been a long 4 years at the daycare, but I got my kids thru preschool and was able to earn an income. Now I'm going back to school to be an RN to do what I love and make some real money.

[Drazil65]

I am sorry I did not mean to get into the details of your personal life and I certainly do not make this man or any other out to be a saint, I feel for your situation I truely do. You asked for financial advice and I just happen to agree with one of the other posters. Sometimes a seemingly bad idea (like just renting somewhere else) just needs some thought from a differrent perspective and possibly from a different angle. There are many roads to the same front door. If you do move closer you will save in so many more areas and that will offset the higher rent. Have you perhaps looked into perhaps a owner financing situation where maybe you sign a land contact (I know, I know but it may work in this situation) and live there 2 years (or whatever timeframe you agree on with landlord). He puts a certain amount of your rent towards your down payment and you finance the house at the end of the rental period. It will take some research to find a situation like that but put your feelers out and tell everyone you know you are looking.

Keep an open mind about your living situation and looking at alternatives, I am sure its frustrating and you have an urgent need to move at this point but you do not want to go from the pan into fire. Unfortunately those student loans will not go away and if you do end up taking over the payments once again you will need to be ready for that financally. I am sorry that you do not have a good relationship with your husbands father and I feel bad that he does not have a relationship with his grandson, something he will regret eventually. I hope you have other family for support as with your medical issues you will need lots of help. I really do send best wishes your way and hope you all can find a way to move to a safer place so you can deal with the medical stuff. Good Luck!