Problems With Secured Debts

So far in this chapter, we’ve been talking about problems with nonsecured debts—money you owe credit card companies, department stores, student loan companies, etc. Nonsecured lenders are often more flexible about working with people who are having financial problems because they have to be (their loans are only as good as a borrower’s ability to pay) and because they charge relatively high interest rates.

Secured lenders—who’ve loaned money that’s backed by specific collateral—are not always so flexible. If you fall behind on the payments for a secured loan on a house, auto or boat, you’re in danger of having the property seized by the lender.

In the case of real estate, that means foreclosure. In the case of a car, truck or boat, that means repossession. Foreclosures and repo’s are the worst marks that you can have on your credit. You should do everything that you can to avoid them.

If you’re having trouble making the payments on your home, contact the lender. The sooner you say something, the better the chance that the lender will work with you to avoid foreclosure.

Foreclosures cause almost as much trouble for the lender as they do for the borrower. Among other problems, a large number of foreclosures will call regulatory attention to a bank or lender. And no bank likes that kind of attention.

A mortgage lender may reduce or even excuse your payments for a short period of time. However, once you start making regular payments again, you probably will have to pay extra to cover the past-due amount.

Another possibility: The lender may extend the repayment period on your loan—basically, tacking missed payments onto the end of the schedule.

Either of these solutions will probably involve some form of fee or penalty; but these fees will usually be a bargain compared to the higher interest you’ll have to pay on everything if you have a foreclosure on your credit report.

Many finance companies specialize in refinancing home loans for people who are having money problems. In these cases, you may end up paying a higher interest rate over a longer period of time—both bad ideas. But a refi can bring your loan current and “buy you time” to get past temporary problems. As long as those problems are temporary.

If you can’t work out a payment schedule with your lender or another finance company, you’ll want to contact a housing counseling agency. You can find an agency through your local Department of Housing and Urban Development office (you can get a list of these on-line at www.hud.gov) or through your local city of county housing authority.

Depending on where you live and the value of your house, there may be a government program that can get you a short-term loan to make your payments or refinance your existing loan.

As a last resort, selling your home usually is preferable to letting it go into foreclosure—at least from a credit score standpoint.

In some situations, though, you can’t sell the house for enough to pay off your loans. If you’re in this position, ask your current lender to refinance your loan to bring your payments current. Show the lender comparative sales of similar houses in your area and any other proof you have of what homes are fetching.

Emphasize that you want to avoid foreclosure and stay put until prices rise again.

One critical note: Foreclosure doesn’t mean that you automatically lose your house. In most cases, you can negotiate terms for “reinstatement” of your loan after the foreclosure process has begun.

With most lenders, a different group of employees manage foreclosure accounts. If your house really won’t bring as much in a sale as you owe on it, the foreclosure staff may be more open to setting up a reinstatement program that will allow you to bring the loan current over a period of time.

As with collections and charge-offs, a foreclosure that you get reinstated will still show up on your credit report for seven years. But it will show that the loan was reinstated which (like a paid charge-off) reduces the damage.

Of course, bringing a mortgage current or getting it reinstated out of foreclosure will require enough income to make timely payments. If you don’t have that income and the house won’t sell for what you owe, you may have little choice but to “walk away.” That means allowing foreclosure to proceed and moving out before the lender evicts you.

Some credit counsellors suggest walking away from a mortgage as a “hard-nosed” or “realistic” approach to resolving an over-leveraged real estate investment. But it does serious damage to your credit; and, if the bank can’t recover the full amount of its loan to you when it sells the property, it can still sue you for the balance. Then, you would have both a foreclosure and a legal judgment on your credit. It’s better to screw up your courage and negotiate a deal with the bank before going into foreclosure.

These renegotiated deals—when made early enough, before foreclosure—may not show up in any form as a black mark on your credit. That’s the main reason to make the telephone call to the secured lender before they make a collection call to you.

Likewise, if you fall behind in your car payments, the finance company that helped you buy the vehicle may repossess it.

As with real estate, car lenders don’t like to repo vehicles. If you call the finance company when you’re still current or just 30 days late on your payments, you can often negotiate a deal to reschedule payments or extend your existing loan.

Auto finance companies are sometimes less organized about reporting late payments and repossessions than mortgage companies are about reporting foreclosures. If you act quickly to remedy a repo, there is some chance that you can fix the problem before it’s reported to the credit bureaus. Make sure to ask the finance company about this—and get a written assurance that the repo hasn’t been reported, as part of your reinstatement agreement.

If you don’t get a repossessed car back, the lender most likely will sell the vehicle. And, as with a foreclosed property, you still may not be off the hook. If the lender sells the car for less than what you owe, you are still liable for the difference.

Next: A "Downward Spiral"