May 2009 Archives

May 16, 2009

Determining Mortgage Modification Eligibility on the Web

In an earlier blog entry and Nolopedia article, I explain the basic requirements for refinancing a mortgage and having your payment reduced under the Obama administration's implementation of the Homeowner Affordability and Stability Plan.

Now the government has put up a user-friendly website dedicated to helping you determine whether you are eligible to have your mortgage refinanced or your mortgage payment reduced under this new law  In addition to eligibility determinations, the website helps you find a HUD-certified housing counselor and, in a resource section, provides calculators to help you determine your debt to income ratio and your likely payment if you qualify for the program. If you are wondering whether the Obama Administration's mortgage modification programs will help you out, this is definitely the website of choice.
May 15, 2009

Stay Away from Debt Management Plans

In a brief article found on the Debt Law Network, the author notes:

The FTC has found that some organizations that offer debt management plans (DMPs) have deceived and defrauded consumers, and recommends that consumers check their bills to make sure that the organization fulfills its promises. If you are paying through a DMP, contact your creditors and confirm that they have accepted the proposed plan before you send any payments to the organization handling your DMP. Once the creditors have accepted the DMP, it is important to:
  • Make regular, timely payments.
  • Always read your monthly statements promptly to make sure your creditors are getting paid according to your plan.
  • Contact the organization responsible for your DMP if you will be unable to make a scheduled payment, or if you discover that creditors are not being paid.
The article goes on to explain what can happen if you are late with a payment. What it doesn't say as clearly as it might, however, is that your plan will most likely go up in flames if you fall short on your payments. In my humble opinion, you should stay away from debt management plans for this reason alone. But there is more. 

First, as confirmed by the FTC, the company you choose may be a scam. In addition to not delivering on its promises, it may be taking your money under circumstances where it's clear you can't afford the plan. Second, by paying a "middle man" to do something that you could do yourself  (negotiate a payment plan with your creditors), you are wasting precious resources. And third, none of the plans that I've seen are willing to open their books and publish their success/failure ratios. Since I don't know what those ratios are, I can only guess that they would likely scare off future customers and bring the FTC down on them even faster than is already the case.

Perhaps my biggest reason for being so negative about DMPs is that they divert your income from you and your family to the DMP company and your creditors. Assume, for example, that your plan requires you to pay $300 a month for three years, and after the first year you are unable to continue making the payments. During that first year you will have paid $3,600 under your DMP for no good reason. Had you deposited that $3,600 into a savings account, you would be in much better shape to rebuild your finances.

Of course, you will still have to deal with your debt in some way. My way is bankruptcy. If you are guided by a morality that compels you to repay your debt, file under Chapter 13 and throw as much money as you can into your Chapter 13 plan. If you, like many, feel justified in getting a fresh start within several months rather than several years under a Chapter 13, file under Chapter 7. Unlike Chapter 13, you can probably handle your own Chapter 7 bankruptcy without a lawyer, which means that for several hundred dollars you can be rid of your credit card debt no matter how much you owe.

"But," I hear you say, "my credit will be ruined if I file bankruptcy." Yes it will, at least for a while, but your credit may likely already be in the tank. More importantly, in the new economy, we will all be required to live within our means. If you are able to save every penny you would use to pay off all or a major percentage of your credit card debt yourself rather than under a DMP, your savings account will be large enough to replace the financial cushion that good credit provides.

To learn more about debt management plans and how to avoid scams, see Nolo's article Debt Management Plans.