Recently, Credit.com’s Gerri Detweiler penned a terrific article about dealing with debt collections — how the process works, the consumer protection laws that guard against abuse and what life can be like in the aftermath.
If Detweiler’s article is, in a sense, the sequel to a financial crisis that led to chronic delinquency and loan-default, consider this one to be the prequel. It’s a guide for those who are fast approaching trouble but have not yet gone past-due on their loans.
To start, there are three things to know.
First, there is absolutely, positively no legal way to get a new Social Security number or to piggy-back on someone else’s purely to escape a debt. Second, it’s nearly impossible to delete derogatory payment information if the data is accurate. Third, it’s unrealistic to expect any meaningful form of relief without first demonstrating your resolve for dealing with the problems you face.
Here’s how to do that.
Track the Cash
Take a critical look at your budget and monthly cash flow. Lenders will want to know that you’re doing all you can to maximize the money that’s coming in the front door — including from second jobs and overtime pay — and minimizing what’s headed out the back, particularly with regard to extraneous spending on such things as vacations and dinner out. (Yes, lenders may require copies of your credit card statements.)
Sell the Toys
Next, turn your attention to the things you own (assets) — luxury items in particular — and the extent to which any of these may be transformed into cash. Just be sure the proceeds are used to pay down principal as opposed to paying ahead on installments that are comprised of principal and interest. You’ll enhance your credit standing and save money, too.
Refinance the Loans
Last, target your higher rate, shorter-term loans, and try to refinance these at a lower rate, or for a longer duration, to reduce your monthly payments.
Now, it’s time to start negotiating with all your lenders, because no creditor wants to be the only one asked for relief. Here are a few options to consider.
If your distress is temporary — a situation that can be resolved within six months or less — but not severe enough to prevent you from making some portion of your regularly scheduled payments, ask about remitting only the interest portion. Doing so will help you to avoid negative amortization — the compounding effect of new interest on old interest, which causes loan balances to increase in size during the relief period.
When your difficulty is more acute but still expected to be short-lived, ask about relief in the form of a temporary suspension of all payments. Just know that in this case, the unpaid interest will be added to your loan balance, and the monthly payments will be higher when the loan restarts.
Finally, if the problem is severe and enduring — because of, say, a lost job that’s replaced with lower-paying employment — negotiate to permanently modify your loan by extending the term, reducing the interest rate and/or forgiving a portion of the principal.
Whatever the outcome, expect that your credit bureau report and score will reflect what’s taken place. Also know that once relief has been granted, it’s unlikely your lender will be inclined to do so again.
Most important, tell the truth. Debtors who misrepresent, mislead or renege on the commitments they’ve made for the relief they’ve been granted will likely face the worst possible outcome in the following sequence: declaration of default, foreclosure on (or repossession of) the collateral, public sale or auction of that collateral, litigation for any shortfall that may ensue, and, potentially, the imposition of liens on other owned-assets (including real estate) and garnishment of wages in order to recoup that deficiency.
One more thing.
Unless your loan is significantly over-collateralized (where the value of the security the lender holds far outweighs the amount that is owed), or you’re unable to have your loans set aside in bankruptcy (because you’ve recently done that or, generally speaking, because student loans are involved), you’ve got some leverage. That’s because the worst possible outcome for you will likely be the most costly course of action for your lender to undertake.
Keep that in mind when you call them for help before they call you for payment.
Editor’s note: If you’re concerned about the effect your debts — or modifications to your debt payments — have on your credit, you can check your credit reports (which you can get for free once a year through AnnualCreditReport.com) and credit scores (which you can monitor for free using a tool like Credit.com’s Credit Report Card). Keeping an eye on your credit can help you know what areas you need to work on, and come up with a plan to work through problems before they become worse.
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