Defaulting on a student loan doesn’t mean missing a couple of payments. Default is the result of a long delinquency in payments, and it is not a situation in which you want to find yourself.
In fact, defaulting on your loan may result in being sued, having your wages garnished, and missing out on tax returns that are diverted by the federal government to pay off your federal loans.
What can you do if you’ve gone into default?
Attorney Daniel Gamez specializes in representing people who need legal help with their student loans. He has different recommendations for federal loans than he does for private ones. Let’s take a look.
Federal loans: Forbearance, deferment, and income-driven repayment
A forbearance allows you to pause repayment on your loan for a set period of time. Deferment works the same way but has an added advantage: you don’t accrue interest during the time off. Typically, you can call the lender to explain your situation and discuss what you can afford, and they will work to get you back on track.
“The lenders want to save costs related to debt collection lawsuits. Plus, they can write off their losses. Usually, you can reach a debt settlement before you are sued for having this debt in default. Once your debt settlement is complete, you can then start rebuilding your credit and moving on with your life,” he says.
Gamez shared a story of one of his clients who was able to work through a default with their federal student loan:
“Our client defaulted on her federal student loans years ago when she lost her job and could no longer afford the payments. She received a notice from the U.S. Department of Treasury that they had intercepted her federal tax refund to apply towards the balance.
She came to us to see what could be done with her student loan. We were able to help her get into a loan rehabilitation program in which she will make nine monthly payments of $5.00 per month to get her loan out of default.
Once she completes these payments, her account will be brought current and all negative reporting will be removed from her credit reports. She will then go into repayment on the loan, but will likely qualify for lower payments through an income-driven repayment plan.
A Loan Rehabilitation is a great way to get defaulted student loans back into repayment as long as you follow through with an income-driven repayment plan post-rehabilitation. Loan rehabilitation can be tricky, but with proper counseling and representation, this will be a huge benefit to those in default.”
Do you need a lawyer to help with loans in default?
You can try to settle private loans or get into a federal loan rehabilitation program on your own. The Federal Student Aid website has a lot of helpful information on how to do this.
Gamez advises talking to a debt relief attorney or student loan lawyer first and says you should never have to pay for advice upfront. “Go to an attorney who offers a free consultation to go over your particular situation,” he suggests. “The advantage of going to a debt attorney is that they can wind up saving you quite a bit of money and stress.”
He explains that the debt collection companies who go after borrowers in student loan default have vast resources of attorneys who “do nothing but sue people all day, every day,” says Gamez.
He adds, “It’s extremely beneficial for the borrower to hire a debt attorney who has a proven track record of helping people get out of student loan default.”
Be wary of debt relief companies
While Gamez thinks it’s a good idea to seek advice from a debt relief attorney, he warns you to be wary of debt relief companies. “These companies are often caught up in scams preying on already vulnerable consumers in default.”
Student loan debt relief companies charge borrowers fees to enroll in federal consolidation, forgiveness, and repayment plans, but these programs are free through their loan servicers. Borrowers often realize this too late after they’ve already paid a debt relief company hundreds of dollars.
Selling debt relief is legal, in theory, and has been compared to income tax preparation services. But lines are often crossed by shady companies that are violating consumer finance protection laws.
The best way to seek help
If you have defaulted on your federal student loan, contact The U.S. Department of Education for help. They will work with you to figure out the best way to resolve your default.
If you have defaulted on a private student loan, first contact your lender to see what options they offer for getting your loan back on track. But don’t settle right away, because you might be able to get a better deal with a different lender.
That being so, it’s important to shop around to ensure you’re not settling for just any offer – you want to be sure you’re getting the best offer.
According to a report by the American Institute of Economic Research, student loan debt is on the rise. In 2003, student loans made up a little more than 3% of debt, but in the first quarter of 2017, student loans made up over 10%.
The delinquency rates for student loans are also rising. In 2017, the delinquency rate on student loans was at 10%. Before the Great Recession, the percentage of borrowers behind on student loan payments was closer to 7%.
The default rates are lower at Sallie Mae, says Rick Castellano, vice president of corporate communications for the consumer banking and loan company. Castellano says that roughly 98% of Sallie Mae’s customers are successfully managing their payments and less than 2% default annually.
“That number has been pretty consistent. Our private student loans are underwritten, meaning we assess the stability, ability, and willingness to repay before making a loan, ” he explains.
You can’t get away from paying student loans, which aren’t even cleared in a bankruptcy. Some borrowers may qualify for student loan forgiveness, but that is rare.
So if you have stopped paying your loans and don’t have a plan in place with the lender, consequences can be dour.
Here’s what you can expect to happen if you stop paying:
1 – Your credit scores will be negatively impacted
The number of payments missed will start to appear on your credit report around the 30-day mark, and your score will start dropping.
2 – Eventually, you’ll go into default
Federal student loans are usually considered in default after 270 days of non-payment. Private loans vary. Depending on your contract with the lender, missing one payment could be considered defaulting, though most companies will allow for more than one missed payment before considering your loan in default.
3 – Tax refunds can be taken away
If you have a federal loan and are in default, the federal government can intercept your tax refund and use it as repayment on your student loan. If you’re married and filing jointly, your spouse’s refund is also at risk.
4 – Garnished wages
A federal student loan allows the government to garnish (or take away) 15%. You can challenge this garnishment, but you don’t really want your employer to know that you’re not paying your bills, do you?
5 – Co-borrowers are in trouble
If your mom is on your loan as a co-borrower, she is also in trouble if your loans default.
6 – You can be sued
It’s highly unlikely that you’ll be sued if you have a federal loan, but private companies have been known to go after defaulters.
Millennials are getting better at managing their money
A new study by Sallie Mae surveyed college students ages 18 to 24 about how they spend and save their money. Despite the rise in delinquencies, the study revealed positive trends.
Castellano says, “It is encouraging to see that more than three-fourths of college students pay bills on time, and six in 10 never spend more money than they have available. Also, college students are putting money aside each month. More than half save at least some money every month, and 24% report having an emergency fund.”
These promising trends may be a result of the financial crisis. Many of the study’s participants grew up during the worst years of the Great Recession, which may have led them to adopt behaviors that promote sound credit management.
If you’re currently behind on your student loans, there are a couple of things you can do before you go into default and are affected by consequences such as wage garnishment.
Here are three options to consider:
1 – Forbearance or deferment
If you’re having trouble making payments, you may be able to pause your payments by using a forbearance or deferment. This will give you some time when you won’t be required to make payments. Deferments are the better choice because you usually won’t have to pay interest accrued during your time away from the loan. During forbearance, interest accrues at the normal pace.
2 – Income-driven repayment plan
An income-driven repayment plan can help you lower your federal student loan payments by adjusting the amount you owe based on your income. This does not apply to private student loans.
If you’ve already gone into default and need help, consider hiring a student loan lawyer or a student debt settlement company that can negotiate settlements with the lenders to lower the amount of the loan.
But whatever you do, don’t ignore your student loans. Figure out a way to make payments and move into the future with a healthy credit score and fewer worries.
Refinancing can help you avoid the consequences of ignoring your payments altogether.
To get started on a refinance, review all the top lenders and make a side-by-side comparison to find the best one for you.
Many of us carry student loan debt. Unfortunately, though, not everyone can easily make on-time payments to pay off that debt. That’s when problems begin to arise. Perhaps you’ve gone into delinquency or default, and the loan company has decided to sue you.
If you are having problems with student loan repayment, whether you are at fault or not, a student loan lawyer may be able to help.
What is a student loan lawyer?
A student loan lawyer is an attorney who specializes in helping borrowers navigate the complicated web of student loans.
Daniel Gamez, an attorney, and head of Gamez Law Firm focuses exclusively on helping individuals in debt. He explains, “As part of my practice, I developed this niche of helping borrowers with their student loan debt when they could not pay them back.
A large majority of this focus is on private student loans (those not backed by the Department of Education). My goal is to negotiate settlements with the lenders where my client’s total debt amount is lowered, and that reduction is paid out over an extended amount of time, with no additional interest accruing.”
Gamez decided to specialize in this field about six years ago when he first learned that private student loans were eligible for settlements. A potential client came to his office with unsolicited offers to settle her defaulted student loan debt.
“She had never been able to make payments, and the lender referred her accounts out to a collection agency, much like what you see happen with defaulted credit card debt,” recalls Gamez. They were offering to settle $42,000 in loans for $9,000, payable in a lump sum.
It was at this point that Gamez realized private student loans were in play for settlement purposes. “I found that a need existed to help people who aren’t able to pay back their private student loans. That includes helping them by negotiating settlements and also defending them if they get sued on their private student loans.”
6 reasons why you need a student loan lawyer
1) Aggressive collection letters and phone calls
“This is usually the trigger point for someone to contact me,” says Gamez. “Most of the people who contact me are scared and overwhelmed with collection activity and the possibility of getting sued.”
2) Served with a lawsuit for defaulted private student loans
“If the lender is successful in getting a judgment against the borrower, they have the option to garnish their wages, levy on bank accounts, or place a lien on their property. These options vary from state to state. It’s common for people to tell me they want my help to avoid a wage garnishment or bank levy,” says Gamez.
3) Help with federal repayment programs
“Federal Student Loans are a different beast, but they offer so many repayment options if you cannot afford the regular payment. The programs are free to sign up for, and you can do them without legal representation. However, I have found that some people are scared that they will mess things up if they try to do apply for these programs on their own. I always counsel potential clients on this fact, that they can do it alone. Some still request that I help them with it.”
4) Get loans out of default through a Loan Rehabilitation
“There are many articles and warnings out on the internet and issued by different entities advising people not to pay for this type of service. Yes, it is true that you can do it without paying someone else, but I have found there is a population of people that would rather pay someone to do that for them.
I think of it as being similar to filing your taxes versus hiring a tax professional to do it for you. I make it clear in my fee agreements that the client acknowledges that they could do this on their own, but they have decided to retain me as their attorney to do so for them. Then I try to make the process as transparent as possible because I have a duty to advise my client of this fact.
5) Disputing the amount you owe on your account
6) Disputing that the entity trying to collect has the legal right to do so
Real life examples
Gamez says one of his clients had a student loan in default with Navient, a spin-off company of Sallie Mae. Once your loan goes into repayment with Sallie Mae loans, they switch over to Navient for repayment and collections if you default, explains Gamez.
This client owed Navient $156,866.47 for five private student loans that she could not afford to pay. They went into collections and eventually wound up with an out-of-state collection law firm.
“My client was fortunate enough to have relatives who would provide her with the funds to settle the debt. We were able to settle her private student loans for $50,019.73, payable in two payments. She needed that time to secure the funds from her relatives. We saved her $106,846.74. That is the largest reduction I have received from a client on a private student loan,” says Gamez.
Gamez says he’s worked with other clients who had similar results. “We have been able to achieve settlements that reduce the loan balances by 50-60% of the total due, with those payments spread out for extended amounts of time. I would say anywhere from 24 to 84 months, and those settlements all come interest-free.”
The cost to hire a student loan lawyer
As with all legal costs, the amount can vary a great deal depending on a number factors including the balance on the accounts, whether or not the account is in litigation, and the number of accounts a lawyer will be working with.
Gamez usually charges a flat fee and says that he cannot make guarantees to his clients. He adds,”But I have found these lenders to consistently settle often for much less than is claimed due. I don’t recall having any clients who have balked at my fees. Most are more than happy to take their student loan problems and dump them on my lap.”
Other options for student loan repayment
Hopefully, your student loans haven’t gone so wrong that you need to seek help from a lawyer. If you’re not in serious delinquency or default and aren’t worried about being sued, consider loan consolidation or refinancing instead.
Freedom Debt Relief is the largest debt resolution company in the U.S. Based in San Mateo, California, Freedom Debt Relief helps debtors negotiate down debt and avoid bankruptcy. Customers commonly seek out these services when they can’t afford monthly payments and home refinancing or debt consolidation are not options.
Amount of debt Freedom Debt Relief has resolved for +500k clients since 2002
In December of 2010, after just eight years in business, Freedom Debt Relief became the first debt resolution company in the country to resolve a total of $1 billion in consumer debt. Now, as of 2018, it has resolved over $8 billion, and more than 500,000 clients are enrolled in its services.
To know more about Freedom Debt Relief, here’s an in-depth review of its services.
How does Freedom Debt Relief work?
The process of achieving debt relief through this company starts with a free evaluation. A Certified Debt Consultant will speak with each potential client, explaining a variety of strategies that are available. Together, the client and consultant can determine if Freedom Debt Relief would be a good solution.
If a client is interested in taking the next step, the consultant will work to customize a program to the client’s needs. The main goals include saving the client money, resolving debt in a shorter amount of time than it can take with other options, and setting a monthly deposit amount that is financially comfortable.
Here’s how the program works:
You deposit money into an FDIC-insured Dedicated Account each month. Your account can be tracked
Federal Debt Relief (FDR) analyzes your debt and creates a negotiation strategy.
When you have enough funds and the strategy is set, FDR will begin negotiations on your behalf by contacting the creditors you owe.
The creditors and FDR will come to a settlement that will offer you savings.
You will be presented with this settlement, which you can authorize or reject.
If you authorize the settlement and it is paid in full, the creditor will report the new status to the credit bureaus.
FDR works towards settling all of your debts so you can move on and start rebuilding your credit.
(If you are trying to decide which is better for you, bankruptcy or debt settlement, read this.)
How does Freedom Debt Relief charge customers for its services?
You may be wondering, “What’s in it for Freedom Debt Relief?” When the company negotiates a settlement on one of your debts, and you authorize it, they will charge a fee. There are no up-front fees.
How does Freedom Debt Relief affect your credit?
Any debt settlement or debt negotiation program, including Freedom Debt Relief, can negatively impact your credit. Here is why. Typically, you will stop paying your creditors, and instead, will invest money into a dedicated account with the company. This will result in missed payments on your existing debt, which appear on your credit report and will hurt your score. When a debt is settled for less than the original amount and marked resolved on your credit report, your score will also drop.
However, the damage done to your credit by a debt settlement is significantly less than the damage from filing bankruptcy. Further, it shows that you did your best to fulfill your obligations rather than giving up, and unlike bankruptcy, it will not show up on public records.
To enroll in FDR’s services, you need to have at least $7,500 in unsecured debt, and you must be experiencing legitimate financial hardship. Note that this company can not help with secured debt, which involves loans backed by collateral such as auto loans and mortgages. Federal student loans are also not eligible for the program, though some private student loans will be allowed.
How to get a free evaluation
To get a free evaluation, you simply visit the website and click “Get Your Free Evaluation.”
Here’s how it works:
Enter the amount of debt you have.
Answer whether you are behind on your payments.
Select the state in which you live.
Provide your contact information.
Then, wait for Freedom Debt Relief to get in touch with you to share the next steps.
Freedom Debt Relief pros and cons
Before you decide whether to move forward with this option, it is always important to do your research. The benefit here is that Freedom Debt Relief is a leader in the industry. With over $8 billion in resolved debt under its belt, it has experience in negotiating with creditors and getting settlements. When a creditor is speaking to a knowledgeable FDR representative who knows the ins and outs, they aren’t going to be able to play games. Too often, when an individual borrower calls a creditor, the creditor might try several tactics to get the customer to pay more than they need. So having an expert on your side can be a big benefit.
The main drawback is that debt settlement will hurt your credit initially. To take this route, you will have to accept taking a hit to your credit score now to resolve your debt and start rebuilding.
Another thing to consider is that forgiven debts are taxable income, so you will have to pay taxes on the amounts forgiven at the end of the year. Exceptions do exist. Find out more about debt settlements and taxable income here.
WEIGH THE PROS AND CONS
Compare the pros and cons to make a better decision.
Freedom Debt Relief is very experienced
The company works to reduce the debt you owe
It can help you avoid bankruptcy
There are no upfront fees
The process can speed up the time needed to repay debts
So, should you enlist the help of Freedom Debt Relief to help you handle your debt? If your debt is unsecured and over $7,500, you will qualify. But this decision is not one to make lightly.
On the one hand, you can reduce your debt owed, avoid bankruptcy, have knowledgeable consultants on your side, and speed up the time it takes to resolve your debt. On the other hand, your credit score is going to take a hit. There are no guarantees. You will have to pay fees for the services and will have to pay taxes on the debt that is forgiven.
Whether the pros outweigh the cons will depend on your situation. For example, if you can consolidate your debt through a personal loan or home equity loan, that would be a better route with fewer disadvantages.
If you can’t, you could also consider a credit repair agency, which can help you manage your repayment plan. However, that will likely cost you more than a debt settlement, and it can take longer.
Debt settlement is for those who are okay with taking a risk and sacrificing some points on their credit score to settle their debts quickly and at a lower cost. It is the last resort before filing bankruptcy.
When you’re in over your head with debt, you might feel there is no way out. In those cases, turning to a debt settlement company might be a good option. But be aware of all your options, and study the terms and fees involved, as well as any impact a settlement might have on your credit score. Here’s what you need to know to find a reputable debt settlement company.
Simply put, a debt settlement is an agreement to pay your creditors less than you owe. And reputable debt settlement companies can help you do this.
While debt settlement does hurt your credit score, it is better than declaring bankruptcy. It can also signal to future lenders that you’re serious about settling your debts.
Keep in mind, debt settlement companies are different from debt consolation companies. Debt consolidation companies seek to combine all your debt with one creditor, usually at a lower interest rate than before. Debt settlement companies seek to lower your debt with individual creditors.
But before you proceed, it’s important that you know if debt settlement is the right option for you – and if it is, how to choose a legitimate, trustworthy debt settlement company.
Is a Debt Settlement Company Right for You?
Enlisting the help of a debt settlement company only makes sense if your debts are large (usually more than $7,500). If your debts are large, the amount you pay a debt settlement company will be less than the overall amount you owe.
That’s the benefit of these firms. Because debt settlement companies employ professionals with specialized training and experience in negotiating settlements, you are usually able to get a better deal with creditors than you would otherwise.
Featured Debt Relief Companies
- Money Back Guarantee - No Monthly Consultancy Fee - Minimum Debt Owed $10,000 - AFCC Member - IAPDA Member
Ask if the company is licensed to work in your state. Also, ensure there are no other consumer complaints on file about the company.
Check whether the company has been involved in any lawsuits with regulators or has been charged with deceptive or unfair practices.
What are the Terms and Fees?
Debt collection agencies are prohibited from charging any upfront fees before they settle your debt. Steer clear of any firms that do.
Some may charge monthly maintenance fees. The best companies only charge performance-based fees. Under those fees, you would not pay if the company does not successfully settle your debt.
Make sure you understand the settlement terms and the monthly payments you have to pay. When you work with a debt settlement company, you may be asked to set aside funds in a separate bank account. Those funds are still yours. You are entitled to the interest on those funds and can withdraw them at any point.
Debt settlement firms must tell you how much money or what percent of your outstanding debt you have to save before it negotiates with a creditor on your behalf. Don’t forget to ask what that amount is.
Be aware of all the fees the company can charge. Every time the debt settlement firm settles a debt with one of your creditors, it can charge you a portion of its full fee. Some may charge a fee that’s a percentage of the total amount you save through the settlement.
Make sure they are explicit when explaining what fees they charge and any conditions attached.
Beware of Overpromises
When searching for an organization to help you, keep in mind that many so-called debt settlement companies have been found to be little more than scams. Some promise to settle all your debts for just a small fraction of what you owe. Or they say they can erase your debt in one year. (Two to four years is more common).
Others deceive consumers about the risks involved. They may not tell you, for example, that most consumers don’t settle their debts and debt collectors may continue to call. According to the Federal Trade Commission, don’t work with any debt settlement company that:
touts a “new government program” to bail out your personal credit card debt
guarantees it can make your unsecured debt go away
tells you to stop communicating with your creditors, but doesn’t explain the serious consequences
tells you it can stop all debt collection calls and lawsuits
guarantees that your unsecured debts can be paid off for pennies on the dollar
How Much Guidance Will You Receive?
The benefit of enlisting a debt settlement company is that you have professionals on hand to answer your questions and concerns. Go with the company that makes you feel comfortable.
Look for companies that have dedicated professional advisors or arbitrators. Check if they’re accredited by the International Association of Professional Debt Arbitrators (IAPDA) or the American Fair Credit Council (AFCC).
The firm must also educate you about the risks involved in debt consolidation. For instance, if the company asks you to stop paying your creditors, it should tell you about the negative consequences. That might include lowering your credit score or having your credit card company charge you additional fees.
Debtmerica Relief has helped 20,000 consumers lessen their debt burdens on credit cards, personal loans, business loans, collection accounts, and medical debt.
National Debt Relief has helped over 100,000 families with services, such as debt settlement and credit counseling. It charges a fee of 20% of the initial balance amount, though that fee can vary based on how much you owe and how much relief the company helps you achieve.
Pacific Debt Inc. operates in 27 states and has a fee that works out to about 4-8% of the debt when calculated over the course of a three- to four-year program.
All of these companies will work with you to figure out how much you can legitimately pay off each month. They will take stock of your entire financial situation. They won’t require upfront fees and will not overpromise.
These are the things you should not compromise on when looking for a company to help with your debt issues.
Struggling with debt problems can seem overwhelming. It doesn’t have to be. Armed with enough knowledge about the types of solutions out there, you can make better financial decisions for your family and your financial future.
Getting into financial trouble can be overwhelming. Many people shove it under the rug, but that only works for so long. There comes a time when you need to face the music and find the best way out.
In 2016, 794,960 Americans chose to file bankruptcy, according to U.S. Federal courts. Is that the best choice for you, though?
We are going to examine filing for bankruptcy and negotiating a debt settlement. You’ll learn what each route entails along with the eligibility requirements, costs, and pros and cons.
Let’s get started by taking a look at bankruptcy.
In general terms, most of us know bankruptcy means throwing our hands up and waving the white flag to surrender financially.
However, more specifically, it is a legal proceeding for people who have outstanding debts that they can not pay. It can allow you to get a fresh start, but it does come with costs.
The two bankruptcy options individual debtors should know about are chapter seven and chapter 13.
Chapter seven debt relief
Chapter seven bankruptcy is also known as a “liquidation” bankruptcy. When you file, a three to 6-month process begins in which an appointed chapter seven trustee manages your case. They determine if you have any eligible assets they can sell to repay your creditors.
However, in many cases, debtors don’t have any eligible assets. The definition of eligible assets in chapter seven cases varies by state. For example, some have exemptions for your home or car up to a set amount.
Once the trustee sells your nonexempt assets and the filing goes through, they will discharge your debts.
To qualify, you need to prove that you can’t repay your debts. You can do so by showing that your current monthly income is less than or equal to the median income in your state for your family size.
If your income is too high, you can still qualify via the “means test.” It looks at your larger final picture, including expenses and taxes. If you don’t qualify, chapter 13 bankruptcy is an alternate option.
The chapter seven filing process
If you do qualify, the process involves the following steps:
1) File a petition with the bankruptcy court in your local area.
2) Provide the court with a schedule of liabilities and assets, current income and expenditures, executory contracts, and unexpired leases. Additionally, you need to provide a statement of financial affairs.
3) Give the trustee your tax returns for prior years and those undergoing filing during the case.
4) Submit proof of credit counseling and any debt repayment plan you create during the counseling.
5) Submit additional proof of income and financial accounts.
6) Pay a $245 filing, a $75 miscellaneous administrative fee, and a $15 trustee surcharge (can be waived in certain cases).
What happens after filing bankruptcy?
Once you file, “automatic stays” applies. This means that creditors can’t contact you to collect what you owe anymore. Initiation or continuation of lawsuits, wage garnishments, and phone calls from creditors will stop. All of your property and debts are handed over to the bankruptcy court.
You will also have to visit the courthouse for a creditors meeting 21 to 40 days after filing the petition. This is a meeting of the bankruptcy trustee and your creditors. During it, you will be sworn in and will answer questions about your financial affairs and property.
The trustee will determine if your case is an abuse of chapter seven or not, and will identify if you have any property that is not exempt from liquidation. The trustee’s goal is to repay as much as possible to creditors from your assets. A decision will be made and given to the court within 10 days.
After the bankruptcy process is complete, all qualifying debts will be gone. The exceptions are child support, tax debts, student loans, secured debts you are paying, and debts which are not dischargeable due to reasons such as fraud or malicious acts.
Chapter seven pros and cons
WEIGH THE PROS AND CONS
Compare the pros and cons to make a better decision.
Shorter process than other bankruptcy types
Discharge debts relatively quickly, restart building credit right away
No requirements for a repayment plan
No limit on debt amount or solvency
In many cases, a debtor’s assets are exempt from liquidation
Grounds for denying an individual debtor a discharge are narrow
Easier to explain to future lenders than a list of debt payments, repossessions, and defaults
Some types of debts cannot be forgiven (liens on property, taxes, etc.)
Case is subject to approval (cannot be considered an abuse of the law)
Must meet eligibility requirements
Stays on credit report for 10 years, three years longer than chapter 13
Can’t file bankruptcy again for six years
Case may undergo conversion into chapter 13
On public record
Now let’s look at chapter 13 bankruptcy.
Chapter 13 debt relief
Chapter thirteen is a bit different. Instead of canceling debts and possibly repaying them through the sale of qualifying assets, you use your income to make payments toward a portion of your debt.
It’s also known as the “reorganization” bankruptcy or the “wage earner’s” plan. If your income is under the median in your state, you get a three-year plan. If it is over, you will get a five-year plan.
You have to make enough income to meet the payment obligations. Further, your secured and unsecured debt obligations have to be below the maximum set limits. The maximum limit for unsecured debt is $394,725, and $1,184,200 for secured debt.
The chapter thirteen filing process
The process for filing chapter thirteen bankruptcy is the same as filing for chapter seven. However, you are required to set up a repayment plan.
What happens after you file?
Once you file, efforts on the part of debtors to collect from you will stop, like with chapter seven.
While repaying your debts in full is not a requirement, you will need to use your disposable income to make payments toward it. Certain debts take precedence over others.
At the top of the totem pole are alimony, child support, some tax obligations, and employee wages. Next, are regular payments on secured debt and then unsecured debts you have fallen behind on.
When the plan ends, any remaining debts will be eligible for discharge as long as you are current on any child support or alimony payments and you have completed the credit counseling course.
One of the most prominent benefits is that chapter 13 stops foreclosure proceedings and allows you to pay your mortgage back over time. You can also reschedule other secured debts and extend them over the payment plan.
Total cost= $310 in filing fees plus repayments according to the plan you create.
Pros and cons of filing chapter 13 bankruptcy
WEIGH THE PROS AND CONS
Compare the pros and cons to make a better decision.
Save your house from going into foreclosure
Keep all your nonexempt assets
Discharge remaining debt after repayment plan finishes
13 bankruptcy comes off of your credit report three years earlier than chapter seven
Have to make payments on debts according to repayment plan
Longer bankruptcy process of three of five years
Bankruptcy appears on your credit report for seven years
If you would like to avoid a bankruptcy on your credit report and the filing process that goes with it, debt settlement may be better for you.
What is debt settlement?
A debt settlement is when the debtor pays the creditor a percentage of their total balance to settle the debt. It is also known as credit settlement, debt negotiation, or debt arbitration. Only unsecured debts are eligible, such as personal loans, credit cards, and medical bills.
How does a debt settlement work?
The process of debt settlement is as follows:
1) Contact the creditor
2) Explain your situation and request a debt settlement
4) Come to an agreement, get it in writing, and pay the amount
Key things to know before calling
There are a few things you should know before calling up your creditor, such as:
They don’t have to agree to any debt settlement
The only reason they will is if they think doing so will protect their bottom line. If you are struggling to keep up with the payments and are likely to default, it is in the creditor’s best interest to take a lump sum from you.
They can see your transactions and credit report
Remember the creditor will be able to look over your recent transactions and your credit report. This can work for you or against you. For example, if you are spending money at nice restaurants and keeping up with all of your other obligations, creditors won’t believe you are struggling.
It’s best to stop using the card several months before calling in for a settlement. It will also likely work to your advantage if you have been struggling to keep up with your payments.
Everything is negotiable – Even debt
Remember, this is a negotiation. It’s best to start with a low offer, around 30% of your balance, and try to settle for 50% or less. It may also help to mention that you are trying to settle with multiple creditors, as it will create competition for your money.
Debt settlement companies or DIY
Some debtors enlist the help of debt settlement companies to help them settle their debt. “Now regulated by the Federal Trade Commission (FTC), these businesses work on a consumer’s behalf to lower the principal balances they owe. Final agreements can obtain savings of 50% of the total debt (before fees),” says Andrew Housser, Co-CEO of Freedom Debt Relief.
Housser explains, “A debt negotiation firm does not make monthly payments to creditors, but rather negotiates directly with the consumer’s creditors while the consumer accumulates funds for the settlement through a monthly program payment.
Debt negotiators charge consumers a fee for their services, typically a percentage of the debt enrolled or a percentage of the debt reduced. These fees must be charged after the firm has successfully negotiated the debt.”
While you can do it on your own, an expert that handles settlements regularly can help. But make sure to choose wisely and ask the right questions, as this type of company is known to have some bad apples that prey on struggling debtors. Whether you decide to handle the negotiations yourself or have a company do it for you, be sure to get the agreement in writing. You don’t want the account going to collections after paying a lump sum to settle.
You may be wondering, “How much does debt settlement affect your credit score?” Like a chapter 13 bankruptcy, a debt settlement will stay on your record for seven years.
Total costs: A percentage of your debt, and the payment to the debt settlement company (if you use one).
While debt settlement can help you avoid bankruptcy and an account going into collections, it does have its drawbacks. Here’s an overview of the pros and cons.
Is a debt settlement a good idea?
WEIGH THE PROS AND CONS
Compare the pros and cons to make a better decision.
Settle the debt for a percentage of the amount you owe
Can typically resolve all debt in two to four years
Only pay for services after debt gets resolved
Repayment terms are typically better than with a Chapter 13 bankruptcy, according to Housser.
Heavily impacts your credit report for two to four years
Collection agencies or creditors can continue to contact you and can take legal action.
Stays on credit report for seven years.
Negatively impacts your credit score.
You have to save up a lump sum.
You have to settle with each creditor.
Have to pay debt settlement company if you hire one for help.
In addition to bankruptcy and debt settlement, there are three other consumer debt relief programs. These include debt consolidation, a debt management plan, and a balance transfer.
Debt consolidation involves combining debt from multiple sources into one loan, resulting in one easy-to-manage payment. Best case scenario, you get an interest rate on the consolidation loan that is lower than the average of all the rates you were previously paying. The drawback is that you may not be able to get approved for a high enough amount or a low enough interest rate if your credit is in bad shape.
A balance transfer involves transferring a balance from one account to another to reduce the interest rate. It is typically a good option if you have a credit card with a high interest rate. You can potentially transfer the balance to a card with a 0% APR promotional period.
Debt management plan
A debt management plan (DMP) typically involves a debtor working with a credit counseling agency to develop a debt repayment plan. The agency then presents the plan to creditors and requests to lower the interest rates and fees. Then, the debtor makes the payment to the agency, which pays the creditors. The plans typically last for four to five years.
Find the right debt solution for you
Debt relief programs work for many people. However, the right solution will vary from person to person. You will need to examine your situation and carefully weigh the pros and cons of each option.
Chapter seven bankruptcy might be the best route for someone with numerous delinquent accounts who meets the eligibility requirements and doesn’t have any nonexempt assets they care to keep. It is fast, affordable, and lets you get a new start quickly. However, Housser says, “This should generally be considered a last resort, as it destroys a credit rating for many years.”
Chapter 13 bankruptcy may be best if you don’t qualify for chapter seven, have assets you want to keep, and have both secured and unsecured debts. It will also look better to future creditors than a chapter seven filing and can help you save your house.
Lastly, debt settlement might work best for someone who has fallen behind on only unsecured credit accounts and has nonexempt assets they want to keep. It will likely be more affordable than a Chapter 13 repayment plan and will come off the credit report sooner than Chapter 7.
It seems inconceivable now, but there was a time when there were debtor’s prisons in the U.S. for those who couldn’t pay their bills. Fortunately, you can no longer be criminally prosecuted for failing to pay what is known as a civil debt, including credit cards, loans or medical bills.
Despite the protections that consumers have from being imprisoned for civil debt thanks to the 1977 federal Fair Debt Collections Practice Act (FDCPA), a growing number of states are allowing judgment creditors to use the civil court system to go after debtors who fail to appear in court regarding not paying their bills. Not appearing can trigger court action, up to and including imprisonment.
Say you put $5,000 of emergency dental work on a credit card and have no way of paying it back, and the bank won’t negotiate with you. The bank as a creditor can file a civil lawsuit against you for nonpayment of debt, and seek repayment plus interest, and sometimes court costs and other fees and fines. If you fail to show up and/or have no adequate defense against the amount owed, the court issues a judgment against you and the bank becomes a judgment creditor.
These judgments allow debt collectors to garnish your wages and attach bank liens to your property. In some states, they go so far as to get arrest warrants against those individuals who failed to show up in court. If arrested, you must post bail to get out of jail. Not surprisingly, your bail is often the same amount as the creditor’s judgment against you, according to NOLO.
Rather than going to jail for failing to pay a debt, you go to jail for acting in contempt of court and not following a court order. Once the judgment is made, the creditor can use law enforcement to pursue the debt and bring you in.
Consumers are often unaware
The worst part about all of this is that many of the individuals who fail to show up in court to defend themselves have no idea that they’re supposed to go to court. This happens because many debt collectors don’t bother to notify debtors of their debt and court case, according to Reuters.
Even when people are notified, they often have no idea how to respond to the situation and may ignore it. It’s common for consumers to think they don’t have enough money to pay for a lawyer or to pay back the debt.
Tips for protecting yourself
There are some tactics you can take to avoid facing being thrown in jail over your debt. Keep the following in mind:
Don’t ignore notices regarding your debt or orders from the court. It’s important to respond, even if you’re broke. Take these notices seriously by contacting the courts as soon as you receive a summons or order. Find out what is expected of you and when and where you should appear.
According to the Federal Trade Commission, if you fail to acknowledge a lawsuit summons, you lose the ability to fight a wage garnishment as well.
File for bankruptcy. When you’re unable to pay, the quickest way to stop the court hearings and judgments that could lead to jail time is to declare bankruptcy.
Go to court. Attend the hearings. If you show up and express your inability to pay, after a couple of tries, the debt collector may give up on you when it becomes clear you don’t have the finances to pay. They only get leverage if you don’t show up, so stay on top of the hearing dates.
Consider other options
Rather than risking jail time for unpaid debts, it’s a good idea to consider all of your options when it comes to paying what you owe.
In the case of federal student loans, check into the various repayment options that are available. For instance, there are income-driven repayment plans, as well as refinancing. Go back to school and you can defer payment until you’re done with classes. The deferral can give you a chance to catch up financially so you can resume paying your student loans.
To avoid the possibility of going to jail because of inaction on your unpaid debt, don’t ignore the problem or expect to be notified by the courts or the companies to which you owe money. Keep good records of all of your debts and make certain to check up with any companies in which you are behind in paying. Keep the companies apprised of your financial situation and work out a payment plan, if possible.
If you’re summoned to court, make sure to show up. No one is going to look after your financial situation better and more thoroughly than you.
Debt is part of most Americans’ lives. We have houses, college degrees and cars that are bought using financing, and loans and credit cards that are used to fund other purchases. The average U.S. household has $5,700 in credit card debt alone.
While carefully managed debt can help you to build your credit, it can spiral out of control if you get behind on payments. If that happens, debt settlement companies can help to get you back on track.
There is some controversy about companies that help people settle debt, and there are some companies out there that aren’t honest with their dealings. However, there are also legitimate companies that can help you to get your debt in order and save you money. Finding a good company requires knowing what to look for, searching for companies, vetting their offers and comparing them against one another. To help with your research, here are four of our top picks for best debt settlement companies in 2018.
Best debt settlement companies
First, it’s helpful to understand how these companies make their money. When you hire one, you will enroll the tax debt you want settled in the program. The company will work on reducing and settling that debt for you. When the process is finished, the company will charge you a flat fee that is a percentage of the total debt you enrolled in the program, typically 15% to 25%. The key factors to consider when choosing a company are how much it charges for fees, how much it can save you on the debt you have to pay and how much experience it has in debt settlement.
Featured Debt Relief Companies
- Money Back Guarantee - No Monthly Consultancy Fee - Minimum Debt Owed $10,000 - AFCC Member - IAPDA Member
Founded in 2006, Debtmerica is a debt resolution firm based out of Orange County, Calif., that has helped more than 20,000 people resolve their debt problems. Its average debt reduction ranges from 45% to 60% of the debt enrolled in the program and it charges a fee that ranges from 20% to 24% of the borrower’s total debt. So if for example, you had $10,000 in debt that you placed in the hands of Debtmerica Relief and it reduced it by 50%, you would owe $5,000 (50%) to your creditors and $2000 (20%)to Debtmerica Relief. You can contact Debtmerica to receive a free consultation and you won’t pay anything until your debt is settled. The company is accredited by the American Fair Credit Council (AFCC) and the International Association of Professional Debt Arbitrators (IAPDA). Additionally, they have the highest rating from the Better Business Bureau (BBB), an A+.
WEIGH THE PROS AND CONS
Compare the pros and cons to make a better decision.
It offers a high debt reduction percentage.
The company has multiple accreditations.
It has a good track record of helping many people resolve their debt.
Accredited Debt Relief has more than 20 years’ experience and offers a range of debt relief options. Its average debt reduction is 45% to 50% of enrolled debt and it charges a fee 20% to 25% of the total debt amount. Typical programs range from one to two years and the fees are paid after the debt is settled.
Each debt settlement case is handled by one adviser for the duration of the debt settlement. All applications can easily be submitted through the company website and the minimum debt amount is $1,000. The company is not registered with the BBB but is accredited by both the AFCC and IAPDA.
WEIGH THE PROS AND CONS
Compare the pros and cons to make a better decision.
Accredited Debt Relief provides its services almost everywhere in the U.S.
It has a low minimum debt limit.
The company has received favorable reviews as well as numerous awards.
Its debt reduction and fees are competitive in the industry.
The company is not accredited with the BBB but has received an A+ rating from them.
Fees may be more expensive than some other competitors.
Established in 2000, Cura Debt is available in 37 states and has extensive experience in debt settlement. It is known to save borrowers about 40% of the debt they enroll in the program and charges a flat fee of 18-20% of the total debt. Applications are completed online, and you are able to speak with consultants via chat if you have any questions.
The company received a five-star rating from the website Top Ten Customer Reviews in 2016 and excellent scores from other online review companies. It is registered with the AFCC and IAPDA.
WEIGH THE PROS AND CONS
Compare the pros and cons to make a better decision.
Cura Debt is willing to work with debts as low as $7,500.
The company has served 180,000 customers in the last 16 years.
It has a competitive average savings rate.
Fees are reasonable.
It has received numerous awards for its services.
Qualified financial counselors are available.
Cura Debt does not offer its services to 13 states.
What makes a good debt settlement company?
There are a number of factors that you need to consider.
There should be no upfront fees. The only money you should pay is the flat fee after your debt has been reduced and settled. As per a Federal Trade Commission (FTC) ruling made in 2010, this is the only way you legally can be charged fees.
No extra fees
Avoid debt settlement companies that charge any extra fees. These can take many forms, including consultation, signing or administrative fees. You should only pay the one fee after your debt has been settled.
With the sub-prime mortgage industry crash of 2008, a host of new debt management companies appeared on the market. Unfortunately, many do not have much experience in dealing with debt settlement and do not have the networks or relationships needed to establish the best deal possible for your situation. Experience is key in debt settlement, so make sure the company you choose has been around for a number of years and is reputable.
The company you choose to handle your debt settlement should have one or more of the following accreditations: the AFCC, the BBB and/or the IAPDA. The more accreditations, the better.
Check for the minimum and maximum debt limits the company has in place. You want to ensure you are within the company’s required debt amount.
High savings on debt
When choosing a debt settlement company, find one that offers you the highest possible savings on your debt. Calculate the fees along with the savings to see the net amount you will save. For example, CuraDebt offers 40% average savings and charges 18-20% for its fee so it offers 20% savings on debt.
Good customer service
It goes without saying, customer support is a crucial part of the debt settlement process. Not only should the process be explained in full before you start, but you should be able to communicate with the company effortlessly throughout the process. Look for a company that assigns one person to deal with your settlement throughout the process.
When you choose to undergo debt settlement, you want the process to be as quick as possible. A good debt settlement company will complete the settlement within one to two years and under four.
It’s important for you to do your homework before making a decision as to which company will handle your debt settlement. Each of the companies above provides trustworthy, quality debt settlement services at a good value. Do you want to compare these with more companies? Click here to check out our debt settlement company “review and compare” page and find the right option for you.
During a medical emergency, how you’re going to pay the medical bill or if unpaid medical bills will end up on your credit report are the last things on your mind.
You may not even know how much this unexpected event will cost until you get the medical bill.
Medical bills are so dangerous because, at the time of an emergency, many of the costs are hidden in the complicated web of insurance policies. Jonathan Walker, Exe. Director, Center for New Middle Class
Those costs can hurt your credit score if you don’t pay them. Medical debt that’s paid late or not paid at all can go to collections and affect a credit report.
In this article, we’ll look at what happens when medical bills go to collections, how medical bills affect credit, how to avoid that, and how to remove medical bills from a credit report.
Medical bills are different to regular expenses. When you’re in the hospital emergency room, shopping for the best and cheapest service isn’t an alternative.
When a child breaks her arm, it would be nice to shop around for the best price on a cast like you might for a new water heater, but it just doesn’t work that way. Most of the time, you can only deal with medical expenses after the bill is in your mailbox.
Americans prefer Credit cards to pay off Medical debt. (Source)
Many people can’t afford to pay a small-scale financial disruption in their lives, let alone larger medical debts.
A survey by the Kaiser Family Foundation and the New York Times found that among the insured and uninsured with medical bill problems, 31% said the total amount of the bills they had problems paying reached at least $5,000. Thirteen percent said their medical bills totaled at least $10,000, and 24% said it was less than $1,000.
Even a $400 emergency expense is enough to challenge many people, according to a 2015 Federal Reserve report. The report found that 46% said that an unexpected $400 expense would leave them unable to pay it or they’d have to borrow or sell something to do so. Among people who wouldn’t pay the bill in full with cash, 38% would use a credit card and pay it off over time, and 31% couldn’t cover the expense.
How medical bills affect credit
Whether an unpaid medical bill ends up on your credit report depends on a few things. The first is if your doctor’s office reports a late payment or unpaid bill to the three major credit bureaus.
A large hospital may, but a small doctor’s office may not. Either way, if your medical provider turns your debt over to a collection agency, then the unpaid debt is likely to show up on your credit reports.
The largest part of a credit score is payment history. It accounts for 35% of a credit score and shows if you’ve paid past credit accounts on time or missed payments. Not paying an account at all, such as a medical debt, counts as a negative mark on your credit history.
A huge drop in your credit score can cause credit card companies and other lenders to deny your applications or can cause lenders to charge you higher interest rates.
Medical debts now weighed differently
Credit scores from the Fair Isaac Corporation, or FICO, are the most used. Most lenders in the U.S. use an older version of the FICO credit scoring system, says Michelle Black, a credit expert at HOPE4USA.com, a credit education and restoration program in Charlotte, N.C.
These older scoring models are designed to pay attention not so much to the type of collection or even the balance of a collection, but rather to the fact that a collection occurred in the first place. Michelle Black
“Even a small medical collection account could potentially be just as damaging to your credit scores as any other type of collection account,” she says.
But things are changing. The newest version of the FICO credit score, the FICO 9, and the VantageScore 3.0 weigh medical bills in collections less than other unpaid accounts.
The bad news is that most lenders don’t yet use these newer scoring models, Black says.
If you pay a medical bill with a credit card, you lose the new medical bill protection in FICO’s latest credit scoring system if the credit card bill is paid late, says Kevin Gallegos, vice president of Phoenix operations for Freedom Financial Network.
“Once debt is owed to a credit card provider, it is not possible to distinguish whether the debt was from a hospital, vacation or a shopping spree,” Gallegos says.
FICO also changed how it deals with unpaid bills that are settled. Overdue or delinquent bills that have gone to collections — which include significant medical debt — no longer count as unpaid bills once they’ve been settled, Gallegos says.
Previously, if you had a bill that was 60 days past due and went to collections, and you then paid the collections department, that event would still have been calculated in your credit score as unpaid,” he says. “Now, the score will treat paid bills as paid bills.Kevin Gallegos
Pay off the debt or wait seven years
Collections can only stay on a credit report for up to seven years. If you can wait that long, then the medical debt will go away, and your credit score should improve.
If you want your credit score to improve during those seven years, some lenders may want to see that you’re paying off collections that are less than seven years old. Others may not care and may continue denying you credit during the full seven years.
The more recent a collection is, the more it will hurt your FICO score. Recent unpaid bills affect your credit score more than olders medical bills, which may persuade you to pay off more recent medical debts and let old ones fall off your credit report.
If you don’t want to wait seven years until the medical debts are removed from your credit reports, you could pay off the medical debt through the collections agency.
You can try to negotiate a debt settlement with the debt collector, agreeing to a monthly payment that fits your budget. Get the payment plan in writing and be sure that it releases you from the entire debt. Without such documentation, any payment could be treated as a partial payment, and the clock will reset the statute of limitations on how long you can be sued for an old debt. Most states set it at three to six years.
Even if medical bills have been turned to debt collectors, there are still ways to protect your credit. “They will always work with you if you’re paying them something,” says Randall Yates, CEO of The Lenders Network, of collection agencies. “Then they won’t report it to the credit bureaus because they know your only incentive to pay is to prevent it from being on your credit report.”
Also, since collection agencies buy debt for pennies on the dollar — usually less than 10-20% of the balance, depending on the volume of debt they buy, Yates says — you can often work out a settlement for 50-60% or less of the amount they’re asking for.
Contest your medical debt
When you first learn about any medical debt, make sure it’s accurate. You can call or write the credit bureaus to make sure the account belongs to you, Yates recommends.
The credit bureaus will contact the collection agency to request information to validate the account. The collection agency has 30 days to respond, or the account will be removed from your credit report, says Yates, who estimates that 75% of medical collection accounts will be removed.
The best way to deal with a medical debt is to do it early.
“If you receive a medical bill which you cannot afford to pay, your best bet is usually to pick up the phone and give the medical provider a call,” says Black, the credit expert.
Sometimes you can set up an affordable payment plan with the doctor or hospital which will prevent the unpaid medical debt from ever being turned over to a collection agency in the first place — thus protecting your credit from damage.
Are you struggling to pay off medical debt? If you are loaded down with unsecured debt, such as unpaid medical bills, you may qualify for a debt settlement program. Click on the link below for a free consultation with a debt settlement expert.
U.S. homeowners who owes more on their house than the property is worth.(Source)
Are you one of the 3.2 million U.S. homeowners who owes more on their house than the property is worth? Being upside down on a mortgage is stressful, but not uncommon.
If you purchased your home at the peak of the market or just before a bursting property bubble in your area, you could be among the many homeowners who need some form of mortgage relief.
Or maybe you’re one of the millions of Americans who finds themselves in either short or long-term financial crisis, making it difficult or impossible to continue with monthly mortgage payments. Fortunately, there may be some mortgage relief options for you as well.
What is mortgage relief?
Mortgage relief can refer to any program or assistance designed to help homeowners who are struggling to pay their mortgages.
Some mortgage relief programs can help you get reduced interest rates, which will lower your monthly payments. Others could give you a break from making payments at all, which might help in the case of unemployment or family medical issues.
Some mortgage relief programs will even wipe out a portion of your mortgage balance and overall debt.
Understand your mortgage terms
Before you look at any mortgage relief programs, you should have a thorough understanding of your current loan and its terms. If you are struggling to make your mortgage payments today, is there a chance that they will increase in the future?
The main types of mortgages are:
Fixed rate mortgages. This mortgage will have the same annual percentage rate (APR) or the life of the loan. The only reason that your payment might change is if there is an adjustment in taxes and insurance.
Adjustable rate mortgages(ARMs). These mortgages have adjustable interest rates for the life of the loan, so your payments will go up and down based on a market index.
Hybrid mortgages. These mortgages are fixed for a specific number of years and then become adjustable rate mortgages. For example, a 2/28 hybrid loan has a fixed rate for the first two years and then becomes and ARM for the remaining 28 years.
Maybe you have an ARM or a hybrid mortgage and are worried about payments increasing. Perhaps, you have one of these loans and payments have already increased, making it difficult or impossible to keep up.
If this is your situation, find out if you can refinance your mortgage to a fixed rate loan. This is worth considering if you plan to stay in the home long-term. Be sure to carefully read your contract. Look out for any prepayment penalties that might try to discourage refinancing early in the loan term.
Do you qualify for mortgage relief?
The type of mortgage relief you should pursue and even what you might qualify for depends on several factors. If you are a homeowner who is current on payments but underwater (you owe more than the home’s value), you might have a better chance of refinancing your mortgage.
On the other hand, if you have fallen behind on your mortgage payments, your situation is more serious. There are still several options that can provide mortgage relief, even when you are at risk of losing your home.
Depending on the program, there may be certain qualifications that you’ll need to meet.
For example, the home should be your primary residence, with the total of your first mortgage under a certain amount. Also, your total payments for your first mortgage, including principal, interest, insurance, taxes, and association fees is more than 31% of your gross household income. In some cases, a financial hardship such as an illness or job loss could impact your ability to make your mortgage payments.
When you are behind on your mortgage payments
If you’ve fallen behind on your monthly mortgage payments, you’re not alone. According to the most recent How Housing Matters Survey, nearly a third of Americans are spending more than the recommended 30% of their monthly household income on rent or a mortgage payment.
That same survey revealed that 34% of Americans either know someone or have themselves been foreclosed upon or been evicted from their home in the past five years. If you’re a homeowner that is missing mortgage payments, the bank is going to notice, and the problem is not going to go away.
You’ll need to face the issue head on with some form of mortgage relief plan, or you will soon have a foreclosure notice in the mail.
One of the first things that you should do is contact your mortgage lender or loan servicer. You should call them as soon as you can see that you will be in trouble with your mortgage. The longer you wait to address this, the fewer options you’ll have for mortgage relief.
The mortgage relief process
The mortgage relief process is often tedious and complicated. When you call your mortgage lender, you will probably be passed along to several people before you find someone who has the authority to speak to you about your loan. Bring your patience, a pen and paper, and some documentation to this phone encounter.
Whether you are dealing with your mortgage lender or another party that will help with mortgage relief, you should have some documentation on hand that includes:
Documentation, such as recent pay stubs, of your monthly gross income.
Let’s assume that you are current on your mortgage payments or only slightly behind. Depending on how underwater you are on your mortgage, you might consider trying to sell your home.
The housing market has recovered considerably over the last several years, and many areas are once again considered seller’s markets. In some cities, there are even bidding wars for homes, so you just might be able to sell your home, come close to paying off your mortgage, and move on to a fresh start.
Chapter 13 bankruptcy
When you are in danger of losing your home and are behind in paying off other debts, you might consider bankruptcy. While usually a last resort when you are in financial trouble, a bankruptcy may allow you to keep your home.
With a Chapter 13 bankruptcy, the court appoints a trustee who will structure a debt repayment plan, which includes saving your home from foreclosure.
Chapter 13 is a valid choice if you want to keep your home but also have other debts that are weighing you down. A Chapter 13 bankruptcy could discharge a 2nd mortgage if you are underwater on your loans, and will help make your total payments more affordable. There are long-term negative credit rating implications tied to bankruptcy, however. If you’re considering bankruptcy, talk to a bankruptcy lawyer before making a decision.
Deed in lieu of foreclosure
A deed in lieu of foreclosure (DIL) is also known as a Mortgage Release. This option requires that you voluntarily sign over the title to the property to your lender. In return, the lender will give you a release from the mortgage obligation.
In some cases, the lender will give you a relocation incentive, allow you to remain in the home rent-free for several months, or will lease the home back to you at market rates for up to a year.
DIL is one choice if you are underwater on your loan, behind on your payments, and are ineligible to refinance. You should also be willing to leave the home and have some type of financial hardship.
Another choice if foreclosure is imminent is a short sale. In this case, you are giving up your home and achieving a release from your mortgage.
With a short sale, the mortgage lender must agree to accept the home sale proceeds as full payment on your mortgage. Potential buyers make offers on the home that the lender must approve. Once closed, the lender releases their lien on the property, and your obligations are finished.
While walking away from your home may seem like the simplest solution, it could have the most negative long-term consequences.
If you are underwater on your loan, the mortgage company can still pursue you for the “deficiency balance,” which is the difference between the loan balance and their sales proceeds. Also, a foreclosure will damage your credit and keep you from qualifying for another mortgage for as long as seven years.
A forbearance gives you a temporary break, where your mortgage payments are either reduced or suspended. If you are experiencing a short-term financial hardship that impacts your ability to pay your mortgage, you should ask your lender for a forbearance.
Terms and qualifications for a forbearance vary by lender. Depending on your circumstances, you might either have to pay the amount due once the forbearance period is up or revise the past due amount through a loan modification.
Loan modification options
The purpose of a loan modification is to get your monthly mortgage payment to a permanently affordable level. Both lenders and the U.S. government define an “affordable” mortgage payment as 31% of your gross monthly income. For example, if you earn $4,300 a month, your loan might be modified to 31% of your gross income, or $1,333.
In some cases, you can negotiate a loan modification directly with your mortgage lender. If you aren’t able to pay your mortgage, it often benefits the lender to negotiate terms with the homeowner that keep them in the home.
A lender might threaten foreclosure, and this is their right, but foreclosing on a home also costs the lender a lot of time and money. If negotiations aren’t going smoothly with the mortgage company, there may be other loan modification options available.
The federal government put several home modification programs in place in the wake of the housing downturn. The popular Home Affordable Modification Program (HAMP), was extended several times but finally expired at the end of 2016. There are a few other choices still in place.
The Home Affordable Refinance Program (HARP) remains in effect through Sept. 30, 2017. This program allows homeowners with either Fannie Mae or Freddie Mac loans to refinance and reduce their monthly payments.
No minimum credit score is required with HARP. This loan can transfer an ARM mortgage to a fixed rate mortgage. A HARP loan will also bundle closing costs into the new loan, so there are no upfront fees.
To be eligible for a HARP loan, you should be current on your mortgage payments. Your original loan date should be May 31, 2009, or before, and your loan-to-value ratio (LTV) must be greater than 80%.
Just a few of the reputable lenders that provide HARP loans are USAA and Quicken Loans.
Another government option is called the Hardest Hit Fund, or HHF. The U.S. Treasury created HHF in 2010 to help homeowners in the states hardest hit by the subprime mortgage crisis.
HHF has a total of just under $10 billion allocated for 18 states and the District of Columbia to help with such things as mortgage payment assistance, principal reduction, and even relocation assistance to more affordable areas. The program remains active through 2020.
When your mortgage is in default, and you wish to save your home from foreclosure, mortgage reinstatement is one of your options. This requires that you pay the amounts past due to bring your mortgage current.
In some cases, a lender will devise a repayment plan to reinstate your mortgage. Your past due amounts will be spread out over an agreed period, and are in addition to your regular mortgage payments.
Mortgage reinstatement is a good choice if your financial hardship was short-term, you don’t want to refinance your loan, and you are only slightly behind on your payments.
The tax implications of mortgage relief
It would be disappointing to get out of a debt situation with successful mortgage relief only to receive a surprise tax bill a few months later. Unfortunately, this is a common occurrence.
When you pursue any debt relief, be sure that you understand the tax implications of being given a “break.” In some cases, when you receive a debt discharge, the IRS treats it as income that is subject to taxes.
Fortunately, the “Mortgage Debt Relief Act of 2007” gives troubled homeowners a break, at least for now. Under this Act, canceled mortgage debt up to $2 million on a primary residence is excluded from taxation as income.
Even if your mortgage relief is exempt from taxes, you are still required to file a Form 982 with your tax return.
Right now, that relief has been extended for all debt that receives a discharge through the end of 2016. If your mortgage relief takes place in 2017 or later, pay close attention to updates or extensions in the tax code. Watch out for mortgage relief scams
After the 2008 housing crisis, there were more than 10 million families who were left underwater on their mortgages. Unfortunately, the scamming didn’t stop with the subprime loans.
Where there are people in financial straits, there will also be scammers waiting to take advantage and make a quick buck. There are some enticing mortgage relief pitches out there that seem like all your troubles will be a thing of the past with just a few signatures. Beware of these predatory mortgage relief scams:
The lease/buy back. Homeowners are convinced that they should sign over the deed to their home to a company who will allow them to continue living in the home as renters. The agreement states that you will be able to buy back the home at some point. Unfortunately, the terms are so rigid that most renters get evicted while the mortgage relief company winds up with your home equity.
Foreclosure prevention specialist. These “specialists” say that they are counselors whose goal is to help you stay in your home and avoid foreclosure. In exchange for some outrageous fees and all your personal financial data, they will make a couple of phone calls on your behalf and usually just postpone the inevitable.
Bait and switch. A fraudster might put paperwork in front of you, telling you that your signature will bring your mortgage current. Instead, you’ve just signed over the deed to your home and will likely be receiving an eviction notice shortly.
There are certain red flags with mortgage relief that give you a clue that you’re dealing with a scammer. Federal law prohibits companies from accepting payments for a mortgage modification before you’ve signed paperwork with the actual mortgage lender. Also, mortgage relief companies can’t guarantee that a loan will be modified.
Making your mortgage relief choice
If you’re having trouble making your mortgage payments or find that you’re underwater on your home loan, there are several options for mortgage relief. The choices you make will depend on your circumstances and whether you desire to remain in your home.
When you are dealing with your home, it’s always best to work with reputable companies and to fully understand terms before you sign. If you’re unsure about a company, check them out. SuperMoney provides free expert reviews and consumer comments to help you out.
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