Part 3: Answers to your credit and debt questions

Here’s the third installment of answers to your credit and debt questions. They’ve been provided by the credit counselors of CredAbility, an Atlanta nonprofit that specializes in consumer issues.

Please return Thursday for the next series of answers. Thanks.

Q: I was recently forced to relocate from Atlanta to Chicago in order to keep my job. I purchased a home in 2008 for $210,000. I was forced to sell it through a short sale for a whopping $83,000. I was always on-time with my mortgage payments and had pretty good credit prior to this problem. My score was around 735. Do you know how this short sale is going to effect my credit and for how long?

Ultimately, I would like to rebuild my credit and purchase another home in my new home state, but I realize that is going to take some time. Also, my credit score is lower than it should be due to a Chapter 7 bankruptcy nine years ago. It was due to fall off my credit report this year. I have worked hard to repair my credit after bankrupty and haven’t had a single late payment since. I’m concerned how this will affect my credit.

What happens if I have to purchase a new vehicle for some reason? Will I be able to secure a loan? The bottom line is that this new lower credit score was beyond my ability to control. Given the current economic situation, I am sure there are thousands of people in my position. Will loan companies take that into consideration, or will they take a hard-nosed approach to people with damaged credit?

A: You are not alone. Home values in metro Atlanta and across the country have fallen below the amount many borrowers owe on the mortgage. First, you should confirm that when you executed the short sale you secured an agreement from your mortgage servicer that the difference between the sales price and the remainder of your mortgage is forgiven. This doesn’t happen automatically. Anyone who completes a short sale without such an agreement is risking that the mortgage holder will pursue the debt at a later date.

If the lender won’t agree to forgive the difference, you should try to work out a repayment plan. Unfortunately, a short sale will be seen as a negative on your credit report for a while. The good news is that since you rebuilt your personal finances after filing Chapter 7 bankruptcy, you already know some of the steps you’ll need to take to get back on track. Pay your bills on time or early, create an emergency fund and live on a cash basis to the extent possible. Over time, you should be seen as more creditworthy. Don’t give up.

Q: I had a van repossessed. Now, about two years later, I get a letter from a judge that indicates that a judgment has been granted to a collection agency for more than the beginning total of the van. I was never summoned to court.  I called the collection agency and it wants me to pay $300 a month for 72 months. Is this legal? Should I pay? I don’t want my wages garnished. I would end up paying more than $300 per month. Help!!!

A: The first thing someone in your situation should do is determine how much they can afford to pay. If you would like help creating a spending plan, you can call a nonprofit credit counseling service such as CredAbility (800-251-2227).

Avoiding a garnishment is important. Not only will a garnishment look bad on your credit report, it will also cause headaches for your employer to administer. Once you have a spending plan you’ll know how much you can afford to pay. Then you can contact the collection agency again and let it know that a third-party counselor has reviewed your budget and helped you determine an amount you can afford. Anyone who has tried these steps without reaching a satisfactory agreement should consider seeking the advice of a consumer attorney.

Q: I have credit card debt of around $30,000. I am maxed out. If I were to go through a debt consolidation company, who would you recommend?

A: We don’t recommend debt consolidation as a way to satisfy credit card debt. Typically those services will negotiate reduced principal, but the cost usually has a negative impact on your creditworthiness because the accounts will be marked as not paid as agreed. There also may be IRS implications because the forgiven principal can be counted as income and taxed.

Have you tried to negotiate directly with your credit card issuers? If you work up a monthly budget, determine what you can truly afford and contact each creditor, you might find they will reduce interest rates low enough that you can afford to repay the debt. If that fails, you can go to www.CredAbility.org to determine if a Debt Management Plan (DMP) might be right for you. The difference between a DMP and debt consolidation is CredAbility’s plan reduces interest rates over the long term and eliminates late fees. But you repay the principal amount borrowed.

Please return Thursday for more answers.

Link to Part 1 answers

Link to Part 2

- Henry Unger, The Biz Beat

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3 comments Add your comment

Andre

January 26th, 2011
11:19 am

How does one submit a question to you – I have one that I could really use some help with.

Henry Unger

January 26th, 2011
6:41 pm

Andre,
We took the questions last week. Why don’t you email me at hunger@ajc.com and I will get it to the CredAbility counselors. Thanks.

[...] Part 3: Answers to your credit and debt questionsAtlanta Journal Constitution (blog)I was always on-time with my mortgage payments and had pretty good credit prior to this problem. My score was around 735. Do you know how this short sale is … [...]