Debt Settlement
Once you are behind in your payments, you can negotiate with the lender to lower the principle amount. The key point is to know when to try negotiating.
Suppose you are current on all your payments and call to make a debt settlement. The lenders will refuse to work with you. They will think that you are pretty much crazy for trying to call them. Why would they settle when your credit is good and they think they are going to get paid the full amount.
When you are a around three months late, lenders will start to negotiate with you. It is important to talk with them before you get sent to collections. After you are sent to collections, it is too late. One way to negotiate is to offer to send in a lump sum if the will take that to settle the account. In many cases, you can lower the principle amount by half.
With a home, this process is called a short sale. If you are a few months late on a mortgage, you can sell your home. The loan contract is used to negotiate, with the bank, an often reduced selling rate on the home. The mortgage insurance will typically cover a 20% loss of principle to the lender.
The good part about the short sale is that you are “saving” your credit. The short sale is not nearly as bad on the credit as a foreclosure. The whole process is achieved through debt settlement.
You do have to be careful, because if the loss is too great, the bank will come after you for the difference. Some people think they will be debt free after a short sale and find that they still owe the bank another 50k and now they do not have a home to live in.
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