Strange Bedfellows--Oh the Debtor and the Lender Can be Friends

This post has been included in the Carnival of Debt Reduction hosted by the Financial Wellness Project. Visit the carnival for more information on getting your financial house in order.

One man likes to borrow now
The other likes to charge him, Wow!
But that's no reason why they can't be friends.

A bizarre coalition of consumer advocates and credit card lenders has asked the U.S. Comptroller of the Currency to change the rules and allow lenders to forgive up to 40% of the credit card debt of folks in serious trouble.

The coalition isn't asking for bailout money, although they do want to change the rules so that the forgiven debt wouldn't be taxable as income. The proposal is for a pilot program that could reach 50,000 people. The lenders could write off the debt. The borrowers would have to be receiving credit counseling and not otherwise eligible for existing credit card repayment programs.

Here's an example where I think it might help. In the summer, when Mr. Poorhouse was working part time because he hadn't been able to find a full time job, we talked to a credit counselor, who told us that we were not eligible for a repayment plan because our expenses exceeded our income. Obviously, entering into a repayment plan when you have negative cash flow isn't a good deal for anybody. The counselor suggested we try to improve our income or consider bankruptcy.

Luckily for us, Mr. Poorhouse and I have fixed our income problem. But it looked pretty bleak for a while there.

I have already heard people criticize this plan because it rewards the irresponsible. I think that's too simple.

I'd be interested in seeing how a pilot program would work.

Further reading from Credit Card Debt Law

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• Banks asking for credit card debt forgiveness

Debt Consolidation: Not the Right Answer for Us

This post has beeen included as part of the 83rd Carnival of Money Stories - Election Day Edition!" hosted by Simply Forties. Check out some of the experiences of others in this rock 'n roll money world.

A few days ago, I posted about the positive outcome that I think came from my conversation with the folks at Money Management International--the mortgage division.

I did not find the debt consolidation group to offer such a good deal. The same night I talked to the mortgage counselor, I went over the same financial details with the credit card folks. Now I've got a number of credit cards (too many). Some of them were just for low-rate balance transfers. Two of them I've used for spending. Two were for my business. Two of them were a big concern--high rates, late payments. The others, I was juggling more or less successfully. (Probably the wrong word.)

After going through the drill with the credit counselor, he suggested that they could lower my 30% rate to 15%, but the others would all stay the same or even increase. They would create a 5-year payment plan to pay off all the debts. I would pay MMI, and they would pay the lenders. And, oh yeah, it was going to cost me $40, that's 4-0, dollars a month.

Say what?

We got rid of cable or satellite TV, Tivo, our long distance plan. We've eliminated movies, eating out, music lessons, soccer, school lunches, new clothes. We've switched to a cheaper dog food, and haven't bought light bulbs for months.

"$40? I don't have $40 a month," I said, said I. I was disappointed, thinking about those 30% rates. "Can we just put some of the credit cards on the plan? Yes?"

Yes. That will be $15 a month. Cha-ching! I told them I had to think about it. So I thought about it. And I might have done it. But by that time my credit card company had come around (as I mentioned here) and lowered my rate to 10%

The moral of the story for me is that it's much better to negotiate with your creditors directly. $40 a month? Really?

The other thing to keep in mind when working with a credit counselor is that the credit card companies subsidize these organizations. If you follow the money, you will see that the settlement the counselor offers may be one that is not in your favor.

Polly's Pointers:

1. Try working with your creditors directly first.

2. If you do work with a credit counselor, make sure they are affiliated an organization such as the National Foundation for Credit Counseling.

3. Avoid paying someone to "repair your credit" or help you get out of debt.

I know that some of those organizations are served by my own Google Ads, and I wish I could tailor the ad services to screen them, but organizations that prey on the desperate and downtrodden are pathetic. Research the organization you are working with to make sure they are legitimate. Don't be afraid to talk to a number of people. You may even want to leverage your conversation with the original lender.

4. Debtor beware. Some of these places run out-and-out scams! They take your money, charge hefty fees, and never pay the creditors leaving desparate debtors worse off than before! Now here's the place in financial crisis where shame belongs.

Further Reading
Profit Possibilities by Elizabeth Warren, blogging at Credit Slips
Debt Relief Can Cause Headaches of Its Own

The Fedex Guy--Better than Ed McMahon

Image via Wikipedia It's better than winning the American Family Publishing sweepstakes. Out of the blue today, the Fedex guy brought loan modification papers for our mortgage.

Believe me when I tell you we did not even know this was in the works. The terms were beyond our wildest expectations. For a couple of hundred dollars extra a month, they will add our past due principal to the amount we owe and spread it out over the life of the loan. The low fixed interest rate does not change. The term of the loan does not change. There are no processing fees or closing costs. All we have to do is sign and notarize the papers and (cough) come up with the first payment, which has an extra $1000 towards the principal amount.

Wow. How did this happen?

Here's what I think it was. A few months ago, we hit rock bottom. Mr. Poorhouse was working minimum wage part time because nobody in retail was hiring managers. I've been working "for the man" since March, but my income just wasn't enough. We had missed a mortgage payment. The well had run dry--we had tapped out our home equity line, our credit cards, my business loan. We had borrowed against my retirement savings. There were no more pots to cover the mortgage and other expenses.

I googled consumer credit counseling services. I found one: Money Management International. I wanted to talk to them right then. But they didn't have an appointment for weeks. (I guess the Poorhouses and the MacMahons have something in common with lots of other folks these days.) I made the appointment.

The day came. I spent an excrutiating evening on the phone going over our financial situation with the mortgage counselor. At the end of the day (literally) he said we didn't have enough income to carry the debt. He talked about options. Selling Assets. Borrowing from relatives. Increasing income (now why didn't WE think of that!). Short Sale. Bankruptcy. Walking away from the property (not that he recommended that.)

I explained that my husband had an full time job offer for a job that would start in September.
The counselor said he would submit a request for loan modification to the mortgage company, but that he could not say what would happen.

I was pretty emotional during that phone call. He was good. He explained he had also had a failed business and had been in this place himself. A little compassion goes a long way.

A few weeks later, I got the "plan" in the mail. All it was was a reiteration of the financial information I had given him, and advice about options (short sale, bankrutpcy, yada yada). It said NOTHING about a loan modification.

(Aside: MMI also has a credit card debt division. Different counselors, and for me different outcome. I'll blog about that another day. See this post.)

In the meantime, the mortgage company called every few days. I mentioned to each and every individual that I had requested a loan modification through MMI. The answer was always the same: "We don't have any information about that."

One day, in a conversation with my husband, the lender suggested a payment plan which would add a hefty (like 50%) addition to each mortgage payment for six months until the loan became current. We talked about it, and I called the next day to work it out, but by then the acceptible payment amount had gone UP. No representative we talked to ever seemed to have any knowledge of any other conversation we had had with any of his or her colleagues. Hmmm.

Well, we agreed to a payment plan. On a payment plan, it turns out, the mortgage company will accept partial payments, so I started paying 50% of the new really high payment out of each paycheck so that I wouldn't be short at the end of the month. All this during a time when my husband hadn't yet started his new full-time job with a full-time salary.

So imagine my surprise when this loan modification fell out of the sky today! It doesn't make any reference to the payment plan we had agreed to. It doesn't make any reference to the credit counselor.

No matter how it came about. You bet your sweet bippy I'm signing these docs.

The catch: I need to send them a certified initial payment plus $1000 cash contribution to reduce the principal by September 25. Trouble is, I just made a partial mortgage payment, and I don't have the cash.

So, for the first time in all of this, I asked for money from a relative. I'll skip the long complicated family relationship story. But this wonderful woman simply said, "Of course, Polly. You don't have to ask. The money is already yours. It isn't a loan. You need it, I'll send you a check tomorrow. And if it isn't enough, let me know."

Saved. Thank you National City. Thank you Money Management International. Thank you lovely relative. I think I'm going to cry.

OK, I'm better. Just wanted to let you know if you didn't already that MMI and other credit counseling services get their funding from the lenders. This modification didn't cost me anything but sweat and tears. If you keep that in mind you may be better off. Follow the money to see whose interest in being served. In this case, it was both ours, and the bank's, which, I have heard on the news, is having financial troubles of its own. The difference is, in our case, the federal government is pretty unlikely to bail us out.

A good day.