Debt Freedom is Required for Retirement
If you’re like most of us, you’re planning to retire on your 401k or other similar Retirement plan. And you’re wondering if Walmart and McDonalds will have too many “senior” team members when you get there. Because you’re going end up with a lower income than the one that you presently cannot live on, you wonder what will you do then? Do you really think social security will be available? Even if it is, how much buying power will it have? My mom used to get the equivalent of groceries and utilities, and that was it.
I will teach you how a 2nd Mortgage can be treated as though Stripped Off your home even in a Chapter 7, and how you can in fact strip a 2nd Mortgage off your home with a Chapter 13.
Because your retirement income will most likely be lower, than your current income: If you’re still in debt at retirement time, you’re going to file Bankruptcy. Why not file right now? Put those credit card payments into your retirement accounts instead. I realize that for most of you, if you didn’t have to pay consumer debts, you would not likely be able to just switch portions of your budget over to retirement planning. You’re eating white bread from Albertsons with non-fat milk and telling yourself that it’s because the non-fat is healthier. Just to pay the gas expense, you’re wearing sweaters at night and walking to the not as good park because you can’t afford to drive to the nice one with the lake. Telling yourself and your kids that walking is good for you even though the slides are broken isn’t making you feel any better. I get it. However, what if you could have a more normal budget and maybe put at least some into savings?
RETIREMENT AND KEEPING YOUR HOME:
YOU MUST GET OUT OF DEBT. When it comes to Retirement, or Wealth Building, getting out of debt is not the FINAL step but the FIRST. Mortgages must be part of the formula. How can you Retire when you’re in debt?
Here’s what I see everyday: Your Mortgage payment is $1500/mo and your 2nd is $500/mo. In Credit Cards you have $25,000 with payments of another $500/mo. Both Mortgages have 30 year terms. At year 10 you start up a 401k plan and a personal IRA. But how much can you put into either? You’ve got $1000 in debt service going out of your budget every month. Each month before you eat, you have to pay $1000 to cyberspace or “The Man”.
Assuming you have an income of $6500/mo and take home $5300 after taxes and insurances, and that you’re married and you have 2 children living at home. First, I’d recommend, one of you must get a better job or another job as soon as possible.
$5300 Net Pay Less
$500 Debts and Credit Cards
$2,800 Left after that. (the rest of the budget must be calculated.)
$700 Two Car Payments
$500 Gas and Travel for the two cars
$100 Car Insurance
$40 Medical Expenses out of pocket
$800 Groceries (and everything that comes from the store) and Fast Food on the way to and from work, school and at work and school.
$400 Day Care
$400 All Utilities including Internet $30, Cell Phones $150, Home Heating & Cooking $100, TV $50, Water $70
You can see that this family’s budget is already negative. Add clothing & shoes $150 (for four), life insurance $80, hair cuts & beauty shop $40, tithing/charitable giving $40, laundry/dry cleaning $35 and home maintenance $20 and you’re toast.
Bankrupt already, and you just didn’t know it.
Filing bankruptcy for this family would be a fantastic idea. Just think about it. Even if they were stuck with the 2nd mortgage when it was over, how much better off would they be if they could just get out of under the credit cards payments.
In a Chapter 7 Bankruptcy they must Qualify. Called the Means Test, the qualification test starts with your gross income and asks first are you above it or below it? If above, then there is an 8 page questionnaire that you must go through to see if you qualify or not, and in my experience, 97% of my clients have qualified by the time we are done with the 8 page questionnaire. In our current test case, the family makes $6,500/mo which is $78,000/yr. The Median Income for a family of 4 this year is $78,869.00 and they get to skip the 8 page test. Part three of the Qualification Test, we go their budget to see if they have any money left over when it is all said and done. Even adding that $500 from the credit cards back in leaves them negative $5.00/mo so they have qualified for a Chapter 7 Bankruptcy.
In Chapter 13 you must also Qualify, but the test is basically this, can you afford to make a payment? Why would you want to do a Chapter 13? If the value of the home is lower than the balance on the 1st mortgage, then this family could do a chapter 13 bankruptcy and strip that 2nd mortgage off of the house. In this case, they would divert the $500/mo that they are paying to their 2nd mortgage, or perhaps even a bit less depending on circumstances, and at the end of three short years, (in this hypothetical case) the 2nd mortgage is gone, the lien is released, and that $500/mo payment is gone forever starting 17 years earlier than planned.
I cannot stress this enough, what happens in month 37?
Okay, probably after a short vacation so probably in Month 40 or 45, they can now put that $500/mo that had been going into the 2nd mortgage into their retirement planning. If it goes into an IRA, Life Insurance, 401k, or whatever, at least it is now going into their future rather than huge bonuses to Citibank and Chase Mastercard’s CEOs.
I would pay the 1st Mortgage off at this point. 17 years x 12 months is 204 months x $500/mo is $102,000. Any mortgage with a $1500 payment could probably be paid off before the 17 years is over when you combine the 2nd mortgage payment with the first and pay down the first with $2000/mo instead of only $1500.
If you put the $102,000 into an IRA or a 401k how much would you have at the end of 17 more years, it’s hard to say, it could easily be only the $102,000 or it could be $250,000. What will the monthly payments be from a pot of $250,000 when you retire? I’m not a retirement planner but I’m sure it would be less than $1500/mo.
So with a chapter 7 our hypothetical family might have some breathing room.
With a chapter 13 they might be able to pay off their 1st mortgage and save for retirement. HERE’S A CREDIBLE PLAN TO RETIRE EARLY THAT CAN ACTUALLY WORK WITHOUT SELLING STUFF TO YOUR FAMILY AND FRIENDS. (Not that there’s anything wrong with that.)
It depends on the value of the house.
DO NOT WAIT, FILE NOW. YOUR HOME’S VALUE WILL START HEADING BACK UP SOON IF IT HAS NOT ALREADY. YOU MUST FILE NOW TO TAKE ADVANTAGE OF THIS.
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