Debt Settlement Balancing Act

Great site, Paul.  I contacted you about 18 months ago, but it has been awhile.  To make a long story short, I purchased a new home in 2006 & was unable to sell my old property.  We had an 80/20 loan (WAMU & Countrywide).  We attempted a short sale, and had multiple offers which the primary lender would not accept.  We sacrificed everything to avoid foreclosure (personal savings evaporated, 401k tapped, stopped paying credit cards, let car go…the works).  In the end, we just gave up.  WAMU foreclosed on the principle balance in August 2008.

I recently checked my credit report, and WAMU shows the primary foreclosed, and Countrywide has charged off the $63,500 second balance.  As a result of this mess, I also have charge off balances from 6 credit cards and a post-repo deficiency balance for an auto loan.

I spoke with a BK attorney, and was advised that I would have to file a Chapter 13 (I do still have a good job).  I would like to begin recovering from this process sooner, and rather than filing a BK and damaging my credit even further, would like to offer settlement negotiations for my debts.  My question is, how do I go about negotiating a debt settlement for both unsecured and secured debts?  Can I negotiate my second mortgage to a reduced loan as a new unsecured note that I can begin making payments on?  Please keep in mind my end goal is to both settle my debt and repair as much of the damage done to my credit as possible.  I’m just not sure where to start.

Thanks again Paul for your candid and expert advice.

Sean

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Hello Sean,

The best scenario with debt settlement is to save up a war chest of funds and then settle them all at once.  Creditors and collectors look at the borrower’s credit report as part of evaluating a settlement, so keeping the credit report as ugly as possible is actually beneficial with debt settlement.  As part of the settlement, a written agreement to remove the tradeline entirely from Equifax, Experian, and Trans Union would be the ideal solution.

Unfortunately, we do not live in an ideal world (at present at least) and settling debts is not so easy.  First, saving up a war chest of funds takes time.  Second, creditors and junk debt buyers might bring a lawsuit against the consumer to (attempt to) obtain a judgment and then depending on state law, may be entitled to garnish wages or levy a bank account. So, all of this has to be evaluated as part of a debt settlement strategy.

One important note is that if the settlement agreement that is obtained by a creditor makes ‘deleting the tradeline’ part of the settlement, then that might be one of the first accounts to settle and this because ‘poof’ it’s gone from the report (as opposed to being ‘paid’ and then the other creditors want to know why they didn’t get paid first).  Of course, that has to be balanced with the distinct possibility that other creditors may file suit (lawsuit) instead of following suit (in a pay for delete settlement of their own).

Thanks for the questions and hope this helps.

Paul

This author is not an attorney and this information should not be considered legal advice.  Please consult an attorney for legal advice.