Loan Modifications and Short Sales
Consumers are getting shelled with letters, radio ads and offers from lenders and companies to modify home loans and “consolidate” debt. I could devote an entire blogosphere to how misleading I think most of these ads are, presenting their listeners with the illusion that the company has an inside track on “the new law” that they can use to help them. Another growing industry are those who claim to be short sale or loan modification experts. It’s the same bill of goods: stay tied to debt you can never afford to repay.
How many times do these commercials warn you not to file bankruptcy? I often wonder if they are trying to imply that you will lose your home if you file for bankruptcy. In the vast majority of cases, you can file bankruptcy and keep your home and avoid foreclosure. What I hear when the ads warn you to not file bankruptcy is: don’t file bankruptcy until we’ve capitalized on your fears and taken every last cent from you before you have no other choice but to file bankruptcy.
Your best bet when considering a loan modification, or a short sale, is to work with your bank or lender directly. Anybody in the middle will just increase your debt.
Loan Modifications
You’ve received that promising letter in the mail from your lender or third-party program to save your home: now what? Go ahead and try, but expect a long, drawn out process and a lot of red tape. Less than 10% of mortgage negotiations are approved for a reduced mortgage rate and at least half of those fail less than a year after the modification. Many report getting foreclosed upon during the process of negotiation the loan.
Talking heads on the television will tell you that a bank will do anything to avoid foreclosure. Not true. Most mortgages are insured and the bank cashes in on these policies when a house goes into foreclosure. The bank often chooses the route that leads them to a more secure bottom line. The banking industry does not sail their collective ship with a moral compass to reduce payments to keep you in the home. The majority of people who successfully get a mortgage loan modification end up going into default soon after. There are exceptions, but be forewarned.
Short Sales
A short sale is where the bank agrees to allow you to sell your home for less than what you owe the bank. I think they call them short sales because it’s designed to leave the seller short. Watch out for short sale brokers, who you may end up wasting a lot of money on if the bank refuses to work with them. It is best to negotiate your short sale price directly with the bank. One of the dangers a short sale may bring you is that you will be responsible for any deficiency.
So, what’s in it for you? You can avoid foreclosure and there is the possibility that it may give you favorable treatment for future credit. Surprisingly, walking away from the home via foreclosure can be a better alternative than dealing with a deficiency (provide they waive it via the foreclosure) than the nightmare of waiting month after month for a bank to approve the sale only to grant you the privilege of owing them a deficiency after the sale.
Why Loan Modifications and Short Sales May Not Work
It’s hard to tell folks sometimes, but there is a real possibility that some people cannot afford to keep their home, and no loan modification or short sale will change that reality. Debt counseling or working with our office can reveal a budget and give people ideas on how to move forward. There are options that wont involve increasing your debt load through debt consolidation schemes, loan modifications and short sales, and if you are faced with a difficult decision concerning your house, call our Wausau office for an free initial bankruptcy consultation.
FTC Warning About Debt Negotation Companies
The FTC Reveals Secrets that the Debt Negotiation Programs Don’t Want You to Know About
We’ve all seen or heard the TV and radio ads from debt negotiating programs that claim they have “secrets that the credit card companies don’t want you to know about.”
What follows is an excerpt from the FTC’s informational:
Enjoy, BL
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Debt Negotiation Programs
Debt negotiation differs greatly from credit counseling and DMPs. It can be very risky, and have a long term negative impact on your credit report and, in turn, your ability to get credit. That’s why many states have laws regulating debt negotiation companies and the services they offer. Contact your state Attorney General for more information.
The Claims
Debt negotiation firms may claim they’re nonprofit. They also may claim that they can arrange for your unsecured debt — typically credit card debt — to be paid off for anywhere from 10 to 50 percent of the balance owed. For example, if you owe $10,000 on a credit card, a debt negotiation firm may claim it can arrange for you to pay it off with a lesser amount, say $4,000.
The firms often pitch their services as an alternative to bankruptcy. They may claim that using their services will have little or no negative impact on your ability to get credit in the future, or that any negative information can be removed from your credit report when you complete their debt negotiation program. The firms usually tell you to stop making payments to your creditors, and instead, send payments to the debt negotiation company. The firm may promise to hold your funds in a special account and pay your creditors on your behalf.
What’s more, most debt negotiation companies charge consumers substantial fees for their services, including a fee to establish the account with the debt negotiator, a monthly service fee, and a final fee of a percentage of the money you’ve supposedly saved.
The Truth
Just because a debt negotiation company describes itself as a “nonprofit” organization, there’s no guarantee that the services they offer are legitimate. There also is no guarantee that a creditor will accept partial payment of a legitimate debt. In fact, if you stop making payments on a credit card, late fees and interest usually are added to the debt each month. If you exceed your credit limit, additional fees and charges also can be added. This can cause your original debt to double or triple. What’s more, most debt negotiation companies charge consumers substantial fees for their services, including a fee to establish the account with the debt negotiator, a monthly service fee, and a final fee of a percentage of the money you’ve supposedly saved.
While creditors have no obligation to agree to negotiate the amount a consumer owes, they have a legal obligation to provide accurate information to the credit reporting agencies, including your failure to make monthly payments. That can result in a negative entry on your credit report. And in certain situations, creditors may have the right to sue you to recover the money you owe. In some instances, when creditors win a lawsuit, they have the right to garnish your wages or put a lien on your home. Finally, the Internal Revenue Service may consider any amount of forgiven debt to be taxable income.
Damage Control
Turning to a business that offers help in solving debt problems may seem like a reasonable solution when your bills become unmanageable. But before you do business with any company, check it out with your state Attorney General, local consumer protection agency, and the Better Business Bureau. They can tell you if any consumer complaints are on file about the firm you’re considering doing business with. Ask your state Attorney General if the company is required to be licensed to work in your state and, if so, whether it is.
Some businesses that offer to help you with your debt problems may charge high fees and fail to follow through on the services they sell. Others may misrepresent the terms of a debt consolidation loan, failing to explain certain costs or mention that you’re signing over your home as collateral. Businesses advertising voluntary debt reorganization plans may not explain that the plan is a bankruptcy filing, tell you everything that’s involved, or help you through what can be a long and complex process.
If you’re thinking about getting help to stabilize your financial situation, do some homework first. Find out what services a business provides and what it costs, and don’t rely on verbal promises. Get everything in writing, and read your contracts carefully.
In addition, some companies guarantee you a loan if you pay a fee in advance. The fee may range from $100 to several hundred dollars. Resist the temptation to follow up on these advance-fee loan guarantees. They may be illegal. It is true that many legitimate creditors offer extensions of credit through telemarketing and require an application or appraisal fee in advance. But legitimate creditors never guarantee that the consumer will get the loan — or even represent that a loan is likely. Under the federal Telemarketing Sales Rule, a seller or tele-marketer who guarantees or represents a high likelihood of your getting a loan or some other extension of credit may not ask for or accept payment until you’ve received the loan.
You should be cautious of claims from so-called credit repair clinics. Many companies appeal to consumers with poor credit histories, promising to clean up credit reports for a fee. But you already have the right to have any inaccurate information in your file corrected. And a credit repair clinic cannot have accurate information removed from your credit report, despite their promises. You also should know that federal and some state laws prohibit these companies from charging you for their services until the services are fully performed. Only time and a conscientious effort to repay your debts will improve your credit report.
If you’re thinking about getting help to stabilize your financial situation, do some homework first. Find out what services a business provides and what it costs, and don’t rely on verbal promises. Get everything in writing, and read your contracts carefully.