As I pointed out in the previous Blog, your DTI is a critical indicator of your financial health—or illness.  If it is weak then here are some suggestions for strengthening it.

Set up, and stick to, a realistic budget.  Look at your costs and try to cut or reduce as many as possible.

Learn how to balance your accounts. Know and understand where, how and why your money is being spent.

Pay cash as often as possible.  That may help limit you to stay away from unnecessary purchases.

Do not buy on impulse. Save up for more important and/or expensive items. There will always be emergency expenses such as automobile, new roof, etc.  Put money into an emergency savings account if possible. 

Try to pay off credit cards as soon as possible to avoid interest rates and late fees.

Reduce the spending limit on your credit card. Or even better Stop Charging. Cancel your credit cards Debit cards or prepaid cards and good alternatives.

Get advice and help if you are having difficulty doing the above and you are facing the possibility of foreclosure. 

 Here in Connecticut, our offices specialize in free consultations on helping you find solutions to mortgage problems including understanding how bankruptcy may work in your favor.

Your debt-to-income ratio is the amount of debt you have in the form of mortgages, car loans, student loans and credit card debt. It is essential to understand this if you have mortgage problems or are in danger of foreclosure.

To figure out your overall debt-to-income ratio add up all of your monthly debt obligations including your mortgage (principal, interest, taxes, and insurance) and home equity loan payments, car loans, student loans, your minimum monthly payments on any credit card debt, and any other loans that you might have. Do not include expenses such as groceries, utilities and gas. Take this total and divide it by your gross monthly income from all sources. For example, if your total family income is $83,000 per year or $6,916 per month. Your total mortgage payment is $1,350, your car loans total $365, your minimum credit card payments are $250 and your student loans add up to $300. That equals a recurring debt of $2,265 a month. Divide the $2,265 by $6,916 and you’ll find your DTI is 32.75 percent.

As for your Credit Card Score, this only shows your payment history and not your income. You can have a very high credit score but still have a very low income. On the other hand, you can have very high income and a very low credit score.

That is why a good debt-to-income ratio can strengthen your negotiations even if your Credit Card Score is weak.  Since the DTI shows how strong you are financially it is important to keep that ratio low.”

Don’t be fooled by distractions.  Too many government plans are placebos.  While companies higher up the food chain await bailouts, and individuals and families try to understand the terms “economic stimulus”, many of you are still in danger of losing your homes.  The waves of distracting panaceas and cure alls are still just that—distractions from reality.

First, you must take stock of your own assets and income.  If you and or members of your family are still earning income on a regular and predictable basis, it is definitely possible that you can forestall the potential loss of your home. 

Check out your own personal options.

As we have written before, chapter 13 is a special situation bankruptcy that may help you.

If so, you need to look to mediation services, loan counseling and other resources.  Do not wait if you are behind in your mortgage payments or already in foreclosure.  Do not wait if you in the foreseeable future may be in a situation that will keep you from making your payments on a regular basis. 

While the mortgage industry claims it’s working to prevent foreclosures, in June of 2008, NBC’s Lisa Myers reported that the numbers show that many people whose mortgage loans have entered foreclosure are not getting long-term relief to help them save your homes. NBC also had several web-only reports that offer a detailed look at mediation services, loan counseling, what Iowa learned from the farm foreclosures of the 1980s and what public servants who are working in the trenches make of the current crisis.

Are you in that situation? Are you behind on your mortgage payments, or already in foreclosure? Or have you just experienced a life change which will affect your ability to pay? Consumer advocates, loan counselors and government housing officials support these recommendations about what to do:

1) Ask for help. Don’t wait.

2) Contact your loan servicer. Check the servicer’s website to see what help is available for borrowers needing assistance.

3) Contact a mortgage help hotline, your state’s department of housing and/or a HUD-approved mortgage loan counseling service.

4) Get a HUD-approved counseling service to take your case and work with your servicer to try and get it resolved without foreclosure.

Avoid foreclosure services that charge you a fee. HUD-approved counseling agencies are generally free of charge.

5) Ask the counselor about the possibility of getting a loan modification — changing the terms of your existing loan to terms you can afford.

6) Attend a foreclosure prevention workshop event in your area to get additional information face-to-face.

7) Don’t apply for more credit.

Connecticut foreclosures are not a state phenomenon. Across the country mortgage defaults continue to rise with no sign of slowing down. Even after their loans have been modified, US banking regulators still see an increasing number of delinquencies. In fact, after six months, nearly 37 percent of mortgage loans modified in the first quarter were 60 or more days delinquent. After three months, 19 percent were 60 or more days delinquent or in the process of foreclosure.

According to John Dugan, head of the US Office of the Comptroller of the Currency, “One very troubling point is that, whether measured using 30-day or 60-day delinquencies, re-default rates increased each month and showed no signs of leveling off after six months or even eight months,” While many members of Congress and the head of the FDIC (Federal Deposit Insurance Corp) urge lenders to modify mortgages, even if this should occur it will take time.

In the meantime, in our state many owners seeking to stay in their homes have been consulting foreclosure attorneys, debt attorneys, bankruptcy lawyers, and other professionals who have a specific understanding of Connecticut mortgage problems and Connecticut bankruptcy laws.

Even though we write this from the perspective of Connecticut Bankruptcy law, it is still generally applicable since Chapter 13 is a Federal law.  Chapter 13 bankruptcy, also known as a “wage earner’s plan”, allows anyone with a regular income to create a plan to repay all or part of what they owe. By filing for Chapter 13, you can pay off your debts in installments over three to five years depending on your current monthly income. You can be eligible as long as your unsecured debts (debts, loans without collateral) are less than $336,900 and secured debts (those backed by assets) are less than $1,010,650. During this time you are protected since the law forbids your creditors from attempting to collect the unpaid debt.

Significantly, Chapter 13 offers you the chance to save your home from foreclosure. By filing under this Chapter, you can stop foreclosure proceedings and may make your mortgage payments over time. You can reschedule secured debts (other than the mortgage of your primary residence) over the time span of your Chapter 13 plan. Doing this may lower the payments. Chapter 13 also has a special provision that protects third parties who are liable with the debtor on “consumer debts.” These terms may protect co-signers as well.

Finally, Chapter 13 functions as a consolidation loan under which the individual makes the plan payments to a Chapter 13 trustee who then distributes the payments to the creditors.

As the finance crisis accelerates and the threat of foreclosure becomes more real, many people realize that the biggest obstacle to keeping their homes is the diversion of their financial resources.  Monthly mortgage payments compete with overwhelming CREDIT CARD AND UNSECURED OBLIGATIONS. These frequently include large monthly car payments often resulting from numerous serial car loan “rollovers”.  There is a continuing vicious cycle of high mortgage debt loads contributing to increased credit card usage because there isn’t sufficient money to pay the mortgage.  You as a family or individual may have to cope with historically flat wage levels or with a fixed income that cannot keep up with your debt load.  Your situation may have been worsened by formerly attractive adjustable mortgages.  You may be suffering at the hands of credit card companies which insist on high interest and default rates.

While something has to give way in a family budget, it should not be your home payments.  It is increasingly likely that the family that ultimately “saves” now is the family that will not be able to pay unsecured bills.  This means that individuals and families with high credit card debt, personal loan debt and other unsecured obligations will need the protection of the Bankruptcy Court if they are ever going to be able to maintain their mortgage payments.  This is especially true given the downturn in the economy which will inevitably means smaller checks with less overtime and bonuses.

While Federal regulators in December 2008 adopted a slew of new rules for the credit card industry to protect against increases in interest rates on existing account balances among other changes, these rules will not take effect until July 2010, more than a year and a half from now.

Until then, despite the obvious difficulties and hardships struggling families will be best served by focusing your income on your mortgage payments, even at the risk of going into default on other “less important” monthly obligations.  Since we are a Connecticut based business, our suggestion is to seek a Connecticut foreclosure lawyer to assist you in your efforts.

More than a year ago, The New York Times ran several stories about the mortgage crisis and the problems many homeowners faced.   The article is even timelier now. As we all know, the foreclosure problem has become an epidemic that seems almost uncontrollable.   However, many homeowners faced with foreclosure have found Chapter 13 bankruptcy to be a viable option.   Our office and the work we do were featured in the story and we are hoping it will be of service to you, our readers especially if you are in financial distress.   Here is the story of several Connecticut families we were able to help as reported by the New York Times.  To read the story click Loan by Loan, the Making of a Credit Squeeze

Note: since that article was published Connecticut has set up a Foreclosure Mediation Program.   For more information, please contact us at 1-800-616-DEBT.