File a Homestead Deed- After the garnishment is already underway you will be served with the garnishment summons. Note that there will be no advance warning. You will either notice some bounced checks if it is a bank garnishment or you will get a call from HR if it is a wage garnishment. On the garnishment summons, in the upper right hand corner, will appear a hearing date and time, normally referred to as the “return date.” On a wage garnishment that date may be as far out as six months from the time the garnishment is issued by the court.

At that point you can prepare this relatively simple document called a homestead deed, take it to the land records of the county where the garnishment is pending, file it there and then, on the “return date” on your garnishment advise the judge that you have filed a homestead deed. Do that correctly, and you should be able to get back all the money that has been garnished so far and take out of your paycheck or that was sitting in you bank account.

So, what is the problem with using a homestead deed in Virginia to deal with a garnishment? Why have you not heard more about it? Well, for starters, unlike a bankruptcy, it does not actually stop a garnishment. To the contrary, the garnishment will be in place for months typically before you get before the judge and get your money back. Meanwhile you have to live with your bank account being froze and checks bouncing or your wages being deducted. Can you go for six months while your paycheck is slashed by 25%?!

Second problem with the homestead deed is that it offers a “band aid approach” to treating a wound, or as a colleague of mine is fond of saying…it is just lazy lawyering. Why? Because in the great state of Virginia, the homestead deed, your “get out of jail card” can protect only up to $5,000 of cash or garnished funds during the entire course of your life time. Meaning, if $3,000 has been garnished from your wages during the past 6 months and you file a homestead deed and present it at the “return date” you may have won a battle, but you will lose the war. Why? Because all the creditor has to do is issue another wage garnishment the very next day and start the garnishment all over again. Eventually, that $5,000 protection that you get will be exhausted. Again, that’s 5K of protection for life. Those over the age of 65 or disabled veterans in fact get $10,000 over the course of their lifetime.

Finally, the last major disadvantage to using up your entire homestead deed is that eventually you will probably have no choice but to file for bankruptcy and some of your assets my now be exposed. Most folks need at least some of that $5,000 under the homestead deed when they file their bankruptcy case.

Having said all that, if you have waited until the day before your “return date” to address your garnishment, and if there is no time to file a bankruptcy, or you simply do not want to file for bankruptcy, a homestead deed may be just what the doctor ordered!

In my next blog article I will address the second method for dealing with a garnishment without filing for bankruptcy.

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Allow me to quickly address the second question: Why will the bankruptcy court expect you to pay all of the debt owed to your creditors? Short answer is that according to Congress, and to a lesser extent the bankruptcy court, you simply make way too much money to deserve a “discount” when it comes to determining how much your unsecured creditors are entitled to get paid. The basic premise of a chapter 13 bankruptcy filing is that the more disposable income you have, the more the bankruptcy court is going to expect you to pay. The folks who benefit most from a chapter 13 bankruptcy filing are those who were close to beating the means test and qualifying for a chapter 7 bankruptcy, but had just a bit too much income. Say for instance the single guy making $57,000 per year who lives in Fairfax County, Virginia. But, that same single guy making $92,000 per year, there will be no “discount” allowed for him. He will be expected to pay 100% of his total unsecured debt. So, what’s so great about that? Why would anyone want to go into bankruptcy if they have to pay all of their debt? Here is why:

1. In real estate the famous mantra is “location, location, location…” Well, in bankruptcy and finances in general, it is all about “interest, interest, interest…” (or APR if you want to get fancy). The great gift that you get in a chapter 13 bankruptcy filing is that you will pay no interest! The interest stops to accumulate the moment you file. So back to my single guy making $92,000 per year with $40,000 in credit card debt for instance…this gentleman has been making timely payments of $1500 per month for the last three years, but since the interest rate is an average of 20% his monthly payments only cover the minimums. Meaning, for the last three years he has not put even the slightest dent into the total amount that he owes because each penny that he has been paying has only covered the interest. Sounds familiar?! Compare that to a chapter 13 bankruptcy where you have to pay back all that you owe in full (the worse case scenario in a 13), what would the payments look like? The bankruptcy court would take that $40,000 that you owe, divide it by 60 months, add a bit of a trustee commission, and your payments would be about $700 per month. So which would you rather do? Keep paying monthly minimums and getting no where? Or having a payment plan where every single payment you make goes towards the principal?

2. In order for a creditor to be entitled to get paid in a chapter 13 bankruptcy plan, the creditor must submit a proof of claim in a timely fashion with the bankruptcy court. If they are late to file –and that happens-, or if they do file but you have a legitimate defense to the creditor’s proof of claim, then the court may determine that they are not entitled to get paid. So now, for example, instead of having to pay back $40,000 in total debt interest free, if one of the creditors “showed up to the party late” or simply failed to file a proof of claim all together then that creditor will not get paid. If the creditor was owed $8,000 for example, then now the total of what you will have to pay has gone down to $32,000 interest free, thereby reducing your monthly payments even further. As far as challenges to proof of claims, well, if the debt owed is now in the hands of a debt buyer, a careful and aggressive bankruptcy lawyer will have a golden opportunity to challenge that creditor and may very well be able to convince the bankruptcy judge that the debt buyer is not entitled to get paid. Again, the total debt that you will have to make payments on may be greatly reduced.

3. You do not have to deal with the enormous stress of being taken to court, harassing phone calls and letters from collectors, and trying to negotiate a settlement or a payment plan with various creditors. The chapter 13 bankruptcy filing gives you the opportunity to once and for all deal with all of your creditors, and put all of your debt behind you.

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Once a Warrant in Debt is filed it usually means that a judgment and possibly a garnishment is not too far behind!

What should you do when you receive a Warrant in Debt? Take a look at the upper right hand corner of the Warrant in Debt. There you will find a date, known as the “return date”, which advises you of the day and time that you are being summoned to appear in court. At that point you have a choice, deal with this matter on your own, or contact a lawyer.

What happens when I go to court on the “return date”? The judge will eventually call the case at which time you simply want to tell him or her that you do not believe you owe this money and that you want to set this case for trial. I repeat: do not admit that you owe the money if you want a trial date. At that point a trial date will be given, typically about 8 weeks down the line and usually “pleadings” will be ordered as well. Meaning, the judge will state that the plaintiff is obligated to file Bill of Particulars by such and such a date, and that you, the defendant, the person being sued, must respond in kind with Grounds of Defense, by a certain date.

The Bill of Particulars is simply a document in which the plaintiff lays out his version of the facts to support his claim that money is owed to him. The Grounds of Defense is a written response to the assertions made by the plaintiff. In this document you are supposed to admit or deny each of those assertions made by the plaintiff and also introduce any affirmative defenses you may possibly have. Bottom line: be sure to file your Grounds of Defense with the court and mail a copy to the plaintiff. Failure to do so my result in a judgment being entered against you even before the trial date.

What happens if I ignore the Warrant in Debt and do not go to court on the date specified in the Warrant? If you do not go to court then you just made the plaintiff’s life very easy. At that point, a judgment will be entered against you by the judge. What’s a judgment? It is a legal determination by the court that you now do in fact owe the money to the plaintiff. Once a judgment has been entered your credit score takes a major hit. In addition, you have now opened up the door for the plaintiff to begin garnishing your bank accounts, or better yet, garnishing your wages. The person who sued you can now also record that judgment in the county where you live, thereby creating a judgment lien on your property. That last part, the judgment lien on your home, is something that not even bankruptcy may be able to help you with.

How will I find out about the Warrant in Debt? Since a lawsuit is obviously a very serious matter, after the Warrant in Debt is filed with the court, service of process must be executed. What does that mean? That means that you must be legally served with the Warrant in Debt. That means that the Warrant in Debt cannot be merely mailed to you, but rather, the Warrant must either be handed to you by the Sheriff or a third party process server, or it must be posted on the main entrance to your home. The court wants to make sure that you know that someone is suing you and they figure that if someone like the Sheriff personally delivers the Warrant to you or at least tapes it to your front door then you will know you are being sued.

Will I always be aware of the Warrant in Debt? In other words, will you always know when someone is suing you? You would think the answer is a resounding “absolutely,” but in fact, there are many instances where the individual will not find out about the Warrant in Debt/the lawsuit until months or even years down the line. All of a sudden, seemingly out of the blue, they will come to find out that their bank account has been frozen or their wages are being garnished. Then, upon further inquiry, they will discover that Capital One or some collection agency for instance took them to court 14 months ago and got a judgment in their absence.

What happens many times is that the company taking you to court will accidentally, or perhaps not so accidentally, rely on a outdated address of yours in order to serve you with the Warrant in Debt. They then go to court claiming that you were property served with the lawsuit, and voila, a judgment is entered.

Is there any way to undo a judgment that was entered against me without my knowledge? Yes! If you can prove that you were served at a “bad address” like your former residence, place of employment, etc. and not your current address where you reside, then a Motion to Vacate the Judgment might be in order. If successful, the judge can determine that the judgment against you should be removed.

I fought the Warrant in Debt as hard as I could but a judgment was still entered against me, now what? Well, if there is no sense in appealing this matter from General District Court (which is where Warrant in Debts are filed) to the Circuit Court since you clearly owe this money and have no viable defenses, if you are not “judgment proof,” and if you have a significant amount of debt in addition to the amount you are being sued for, then bankruptcy at this point is certainly something you will want to consider. When all else fails, you have the “nuclear option” at your disposal, which will typically wipe out almost all of your creditors.

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While the foregoing sounds simple enough, the problem that bankruptcy lawyers run into is that their version of what a “creditor” is, and the client’s version of what a “creditor” means are often not one and the same. The bankruptcy attorney will typically ask you: Do you owe money to any family members or friends? And following the proverbial “deer in headlights look” the client will typically say, well yeah, I borrowed $5,000 from grandma a while ago, but I plan on paying her back. I am not trying to discharge/wipe out her debt, so no need to include her in my bankruptcy case. Or, other bankruptcy clients will simply tell their bankruptcy lawyer, sure I owe my best friend some money, but I feel embarrassed about him finding out that I am filing for bankruptcy so I do not want to list him.

What’s the problem with all this? The bankruptcy laws do not work like this. If you owe someone money, regardless of the amount or who it is, their name and correct address must appear on the bankruptcy petition and they must be informed of your bankruptcy filing. However, people who are not owed money are not creditors. So, if grandma simply gave you that $5,000 with no expectation of you paying her back (very sweet of you grandma), then that is a gift as opposed to a loan, and thus grandma need not be listed a creditor. And of course the determination of whether the money received was a gift or a loan must honestly be determined by you!

As for the “Why?” As in, why must you disclose all of your creditors with no exceptions? Well, because that is what the bankruptcy laws require. You cannot pick and choose who you want to include and not include as a creditor in your bankruptcy petition. So, that also means that you cannot use the phrase “I do not want to include the house/car loan/my doctor/whoever in my bankruptcy case” when you decide that you need to file for bankruptcy. The fact that you are going to continue to make payments to that particular creditor like your car lender, mortgage company or student loan lender does not make a difference. Just because you are not trying to wipe out/discharge a particular loan does not mean –for bankruptcy purposes- that the entity is not a creditor.

A few other things to keep in mind. If you owe a small amount of money to someone such as your doctor and you do not want the good doctor to find out, then you may pay him that $300 bill prior to the filing of your bankruptcy case and not list him since he is no longer a creditor. But, do not do so, if say the bill is $3,000! Now we are getting into preference territory, which is a whole other topic. Second, just because you listed your cousin as a creditor because you owe him some money, does not mean that you cannot pay him back. After your chapter 7 bankruptcy case has concluded, you are free to pay back any creditor you like.

You should NOT however try to pay back money owed to family members prior to the filing of your bankruptcy case! Please see my previous blog article titled Bankruptcy Preference and How Do Get Your Mom To Really Hate You.

And please refrain from giving me that sneaky smile and asking me “Well, what if I do not list all of my creditors…how are they going to find out?” Or, what if I give you a bad address for grandma? If you ask me these sort of questions it will mean that you just wasted several hour of your life. That will be the end of our meeting and I will not take on your case.

Finally, bear in mind, at the creditors hearing, the trustee will ask you if you have listed all of your debts and all of your assets? By debts he means creditors. Can you lie to him at that point? Sure you can. Is it advisable? Absolutely not!  If you get caught in that lie then your bankruptcy case can get dismissed with prejudice and you are now stuck with all that debt. In addition, if the US Attorney’s Office has some free time on their hands, you may also be prosecuted for bankruptcy fraud.

So, with all that said, I will ask you again: Have you disclosed to me all your creditors? Have you paid back any money to family members during the last year? Are you sure?!

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Another misconception that you frequently encounter is that “these people are working the system,” as if they have planned their bankruptcy filing for months, if not years.  My clients have desperately tried everything in their power to avoid filing for bankruptcy. They have called their credit card companies to try to work out a payment plan, they have tried credit counseling with Money Management or some other company, they have cleaned out their retirement accounts, they have moved in with their parents or some other relative.  In short, my clients have done everything under the sun to avoid having to sit in my office chair and declare bankruptcy.

Finally, as for the assertion that “these people” simply do not know how to mange their money and live within their means, I can assure you, trips to Europe or shopping sprees is not what is leading the vast majority of my clients to file for bankruptcy. Yes, of course, there is always the “rotten apple,” the individual who takes advantage of the system, but for the other 90%, the following are the real reasons that push people into declaring bankruptcy.

Illness or disability – If you have managed to make it through your entire career without being seriously injured for a prolonged period of time or permanently disabled to the point that you can no longer perform most jobs, then consider yourself lucky.  By the time your Social Security disability income finally kicks in, you will be fortunate to receive half of your previous salary, making it nearly impossible to survive.

Unemployment -  Unless you have been living under a rock, you know that the unemployment rate is pretty darn high these days. Been out of work for 1.5 years like my father was a couple of decades ago, and well, it becomes pretty hard to pay your bills. And even then, people will usually avoid filing for bankruptcy, will rejoin the workforce and will try to climb out of the hole. Problem is, at some point, it becomes the point of no return.  It becomes nearly impossible to pay off $30,000 in credit card debt at 20% APR when all you are making is $60,000 per year.

Divorce - I would say that about one third of my clients have divorced within five years prior to arriving in my office or are in the midst of divorcing. The ramifications of divorce are not always instantly felt. However, the fact of the matter is, for most people (women in particular), the writing is already on the wall.  With no alimony, kids to raise, and a merely a decent pay check, these newly divorced folks become more and more dependent on credit cards, pay day loans, car title loans, and personal loans. Eventually, the music stops.

Failed businesses – Once the government contracts dry up or the economy slows down, the LLC or Corporation begins to fail. Unfortunately, some individuals go down with their sinking ship. Business owners have guaranteed personal loans or have used their personal credit cards in a desperate attempt to save their business.  As the business is no longer profitable and the debt begins to mount, creditors begin to pursue these folks personally and bankruptcy is typically the only way out.

Underemployment - People like to talk a lot about unemployment numbers, but I think the statistic that hides in the shadows and is often overlooked is the fact that millions of people in this country, particularly those living in more expensive parts of the country like Alexandria, VA and Fairfax, VA, simply do not earn enough money.  They can barely cover their bills, but when it comes to anything “extra,” like a trip to the dentist, the basement floods, or the car has to be taken to the mechanic for major repairs, there simply is not enough money in the bank.  That is when credit cards and personal loans become relied upon out of mere necessity.  This typically goes on for years as the individual faithfully pays at least the minimum balance each month.  Eventually, the amount of debt becomes insurmountable and the only way to escape is to file for bankruptcy.

We need to stop referring to people who have filed for bankruptcy as “deadbeats.”  It not only demonstrates insensitivity, but also a great deal of ignorance as to why people declare bankruptcy in the first place.  So, my advice is “judge not, lest you be judged.”

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A few months ago, a young doctor met with me for a bankruptcy consultation (yes, even doctors have to rely on bankruptcy sometimes, as do lawyers for that matter).  She had seen two other bankruptcy attorneys in the Alexandria, VA area and wanted to know if she could indeed qualify for a chapter 7 bankruptcy.  One attorney had said yes and the other had said no.  I was the deciding vote. The doctor went on to inform me that she had one primary large business debt that she could no longer afford and was now being threatened by a lawsuit. Other than this one business debt, she was current with all of her other creditors. What was my diagnosis? Well, the doctor could indeed file for a chapter 7 bankruptcy. But what did I tell her? I said, “Doctor, while I would love to take your money, the fact of the matter is you may not need to utilize bankruptcy at this point.”

Filing for bankruptcy is something that you do as a means of last resort.  Filing for bankruptcy is like using the nuclear option; when you use it, you want to be darn sure that this is the only and best option at your disposal.  I went on to explain to the doctor that she may be better off hiring an attorney that does primarily civil litigation and who might be able to negotiate a reasonable deal with her creditor if a lawsuit was indeed filed. I went on to state that in my professional opinion, if she could reach a reasonable deal with her creditor, using the threat of filing for bankruptcy as leverage in her negotiations, then it would be in her best interest to take the deal rather than file for bankruptcy. If, and only if, the creditor was not willing to work with her, then she could come back and hire me as her bankruptcy lawyer.

I told the doctor that coming to a bankruptcy attorney is like going to a surgeon and asking him/her to perform open heart surgery without even considering other forms of treatment such as medication, exercise, and diet. Sometimes open heart surgery is absolutely necessary and vital, but not always.  Just because you are over your head with financial troubles does not always mean that bankruptcy is your best option.  Sometimes there are other options that will better serve you. Sometimes, you need to stop and ask yourself, “Do I even need to file for bankruptcy in the first place?”  And if the answer to this question is an indeed and emphatic, “Yes!” then by all means, do schedule an appointment to come and see me for a free consultation.

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The process of getting a loan modification almost always takes months and months. First, comes the grueling process of getting the bank to actually consider you for a temporary loan modification. Then, theoretically after three months of on-time payments, the bank is supposed to decide on whether or not you have been approved for a permanent loan modification. I say theoretically because a loan modification approval/denial can take as long as one year to receive. And after ten months of phone calls, letters, pleas, a tremendous amount of stress, and not to mention timely reduced mortgage payments, the bank will most likely tell you that you do not qualify for a permanent loan modification. In addition, the bank will tell you that you now have 30 days to catch up on your arrears. So, if you cannot come up with thousands of dollars to make up the arrears, the foreclosure proceedings will immediately begin.

Take for example “Jane.” Jane is a self-employed, single mother who up until recently had very good credit. Jane’s business begins to suffer as the economy takes a turn for the worse. Money is now tight. Despite her financial set-back, Jane is able to keep up with her mortgage payments as long as she cuts back in other areas. However, Jane begins to hear more and more about loan modifications. One day, she runs into a “nice gentleman” who promises her that he will be able to get her the magical permanent loan modification for a fee of only $2,000. Jane signs up with the nice man. Ten months later, Jane is sitting in my Alexandria, VA bankruptcy office talking to a bankruptcy attorney for the first time in her life. And here finally comes my point– The travesty is that Jane, while she suffered a financial set-back, still could have managed to cut back on her expenses and continue paying her original mortgage payments had she not been lured in by the banks with their proverbial “pot of gold” known as loan modification.

What could Jane have done in order to avoid having to file a chapter 13 bankruptcy case? For starters, she should have never paid any money up front to that “nice gentleman” who promised her a loan modification. Jane should have gone to see a Housing and Urban Development (HUD) certified counselor who would have helped her free of charge. Second, she should have consulted with a lawyer, perhaps an Alexandria, VA bankruptcy attorney, who would have offered her some honest advice. Such an attorney could have warned Jane of the dangers of what she was about to do. Such an attorney could have explained to her that she was now taking a gamble and that she needed to cover her losses; the eventual likely scenario of her permanent modification being denied. Jane would have been told that she should save the money she was not spending due to the reduced mortgage payments. This way, if the permanent loan modification was not granted, she would have the money to immediately catch up on the arrears and not face a looming foreclosure and eventual chapter 13 bankruptcy filing.

Well, at this point you might be saying, hey genius, Mr. clever Alexandria, VA bankruptcy lawyer, most of us simply do not have the means to put aside every month the difference between the reduced mortgage payment and the original mortgage payment. If we had that kind of money we would not have bothered with a loan modification in the first place. You are absolutely correct. Though, and here comes my next point, had you been warned from the outset that you would likely face ten months of reduced monthly mortgage payments only to face the denial of your loan modification application and subsequent foreclosure on your house, then you would not have “donated” all that money to the bank. Rather, you could have cut your losses, rented a much cheaper apartment, and moved on with your life.

It is almost like the bank intentionally lured you down the path of reduced monthly payments knowing full well that in the end they would deny your application. After all, mathematically speaking, what results in more money for the banks? Ten months of reduced mortgage payments followed by a foreclosure or putting an end to their cash flow by immediately moving in for foreclosure? And besides, they have the Treasury Department and the White House to impress. And that is why many pundits refer to the loan modification program as “extend and pretend.” As in, banks extend temporary loan modifications for a while, take some photo ops, all the while pretending that they will grant you a permanent loan modification.

So what do banks and loan sharks have in common? Sure, they both give out loans. But while one is armed with the threat of brute force, the other is armed with something far more powerful than that…the law!

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And how in the world does this relate to bankruptcy?

Well, here is my version of this commercial with a twist:

Being forced into filing a chapter 13 instead of a chapter 7 bankruptcy because Susan’s salary has increased from $60,000 to $70,000 after putting off filing for several years=$10,000 in unnecessary payments.

John’s decision to file for bankruptcy AFTER the foreclosure sale has occurred instead of before and depriving himself of this expense on the means test = an additional $15,000 in payments.

Joe’s decision to move out of the marital home after he and his wife have decided to file for divorce and thereafter deciding to file for bankruptcy necessitating a  chapter 13 bankruptcy filing due to his high earnings =$20,000 in wasted payments.

Seeing a bankruptcy lawyer well in advance, when you first detect trouble, so that you can formulate a plan and know your options, priceless!

We hear it all the time, life is all about timing, and when it comes to bankruptcy law, that is especially true. The timing of the bankruptcy filing can make a huge difference. In other words, procrastination, as usual, can lead to problems. So, whether you live in Alexandria, Virginia or some other part of the Commonwealth, go and see a bankruptcy attorney and get his/her advice.  Notice that I said go and see a bankruptcy attorney; you don’t necessarily have to hire them, just get yourself informed.

And in case you are wondering, the names I have used in this article are indeed fictitious, but the factual scenarios regrettably are not. Most bankruptcy lawyers offer a free initial consultation. Take advantage of that now, instead of later. At the very least arm yourself with information.

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How do loan modifications under HAMP work?

HAMP is “supposed to” (and if there was ever a time to state strong emphasis on “supposed to” this would be it) reduce a borrower’s mortgage payment to no more than 31% of the homeowner’s monthly gross income.  That is, if the homeowner is able to demonstrate that their current mortgage payment is no longer affordable due to a financial hardship.  You are supposed to be given a temporary 3 month loan modification, after which time, a decision is supposed to be made to determine if you qualify for a permanent loan modification. The whole purpose of the program is to reduce your monthly mortgage payments after you have suffered a financial set back and allow you to avoid facing a foreclosure of your home.

So what’s the problem with the HAMP loan modification program?

It is an extremely long and grueling process that rarely results in the banks agreeing to a loan modification.

While at Church on Sunday with my wife (we were celebrating our 1 year anniversary that day by the way), I read something interesting that struck a cord with me.  Mind you, this is not a religious message, but a short story about struggle and persistence.  The homily spoke about Jesus telling a parable on the necessity of never losing heart. In the story of a widow who suffered injustice from her opponent, the judge was hardhearted, unconcerned with her rights or God’s justice. The woman persisted in her demands, yet he refused to listen. Eventually, though, the judge was worn down by the woman’s pleas and settled the case in her favor.

As has been documented time and time again since the HAMP program was launched last year, if you intend to secure a loan modification, then you had better be extremely persistent and be prepared to wear down the mighty banks.  Like the Judge in the foregoing story, the banks will be hardhearted and unconcerned.  Expect to make dozens and dozens of calls, faxes, letters, and so forth to the banks, all while being given different responses perhaps in the same day.

Who enforces the HAMP loan modification program? Who enforces the HAMP guidelines and ensures that people who qualify for a loan modification do in fact get one from the bank?

No one. The HAMP program is voluntary.  The HAMP program is not law.

Contrary to what some may think, you are not entitled a loan modification.

The banks are not legally obligated to give you a loan modification even if you are able to demonstrate, as so many people have, that you qualify for a loan modification.  And despite the hundreds of articles that have been written on the subject, I have been amazed at how little emphasis there has been to highlight this fact. That is until I read the Washington Post article this past weekend titled “With a change in approach, housing crisis can be eased” by Ezra Klein. And so, while the Treasury Department might give the banks a talking to from time to time, to date, despite such legal arguments as “third party beneficiary,” there has been no judge in the country that has ruled that banks must, and not merely ought to, approve a loan modification when the circumstances and numbers are there.

Are permanent loan modifications really permanent?

No. The term “permanent loan modification” is actually somewhat deceitful.

The reason I say that is because there is nothing permanent about the HAMP loan modification program.  There is a reason that you will see some articles putting the word permanent in quotation marks. If you are in the minority, those fortunate enough to emerge from this hellish process with that sought after “permanent” loan modification, then you need to understand that while cracking open that bottle of champagne might be in order, this is not in fact a permanent solution.

The terms of your “permanent” loan modification will only last for five years. What happens after five years? Well, that very low interest rate that you currently have, which has allowed for your much smaller mortgage payments, will be increased by 1% every year until it reaches a certain Freddie Mac cap rate.  So, eventually (granted, years down the road) your mortgage payments will once again reflect roughly what you were paying before you were approved for a loan modification.

What happens to the money that is reduced by the banks if a loan modification is granted?

The banks are not giving you principal reduction.  The difference between the original mortgage payment that you were paying and the monthly payments that took effect during the temporary and so called “permanent” loan modification period are not forgiven. The amount of savings is actually set aside in an account that the homeowner must pay upon sale, refinance or the maturity of the loan.  So, those tens of thousands of dollars that you are able to save during the 5 year “permanent” modification period will have to be paid back to the banks eventually. As with student loans, this is basically a deferment.  And as with any deferment, it will help you in the short run but it hurts you in the long run!

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In theory, debt settlement is supposed to work as follows: Rather than paying the full amount that you owe to your credit card companies, debt settlement companies, using their “savvy business skills” will negotiate with your credit card companies and get them to accept only one half of the amount you owe.

Now, let’s look at the disadvantages with debt settlement companies.  First, debt settlement companies will claim that using their services will save your credit score.  That simply is not true.  Debt settlement companies might be telling you, or you might be telling yourself, that filing for bankruptcy will destroy your credit score whereas using the debt settlement route will avoid this huge blemish on your credit report. What’s the problem with this logic? Well…ah…it’s wrong. The majority of people when they are at the crossroad of bankruptcy vs. debt settlement have a credit score that is, well, how should I put this, pretty bad. Filing for bankruptcy at this point will not harm your credit score. If you credit score is below 600 there is not a whole lot left to harm.  In fact, filing for bankruptcy will stop the bleeding and give you the opportunity to start to rehabilitate your credit score.

What about the people who are still hanging on, making their minimum monthly payments and have a credit score that is 600 or higher? Aren’t they better off choosing debt settlement to avoid bankruptcy? Well, that brings me to my next point; using a debt settlement company will destroy your credit score.  One of the first things a debt settlement company will tell you is to stop paying your credit card companies and start making monthly payments to them instead.  They will go on to explain that once they have accumulated 50% of your outstanding credit card debt they will then enter into negotiations with your credit card companies to settle your debt. For most people that typically means several years of payments to their debt settlement company. What’s the problem with this seemingly logic tactic? Well, within 2 to 3 months your credit score will be severely damaged.  After 1 year, it will be completely destroyed.  Credit card companies want timely payment from you every month and they can care less that you are working with a debt settlement company.

And here comes problem number three; debt settlement companies leave you exposed. If you think that credit card companies are going to sit idly by while you are making payments to your debt settlement company then, I hate to tell you, you are simply mistaken. Credit card companies will eventually sue you, get judgments, and seek to garnish your wages, all while you are making payments to your debt settlement company. And what happens when you complain to your debt settlement company? After a whole bunch of nonsense and run around, your debt settlement company may have the temerity to suggest that you should file for bankruptcy.  In fact, here comes the kicker, they might even encourage you to retain their services for the filing of your bankruptcy as well.

The remaining problem with working with a debt settlement company comes down to dollars and cents. They want a whole lot of money and they want it upfront.  Moreover, the money is non-refundable, regardless of whether you successfully complete their payment program! Meaning, during those initial six to twelve months of payments, virtually all of that money is going into their pockets.   Debt settlement companies typically want 15% of your credit card debt as their fee, plus some additional junk fees.  For instance, if you have $40,000 in credit card debt, expect to pay them at least $6,000 for playing the middle man.  Not to mention the fact that for most folks being put on a payment plan of anywhere between $500-$1000 per month for several years is next to impossible.

So, are there any benefits to using debt settlement companies? Does my article speak the truth or offer you a biased opinion of a bankruptcy lawyer? Are you wondering what sort of track record do debt settlement companies have? Read the following articles to see for yourself: The New York Times article Peddling Relief, Firms Put Debtors in Deeper Hole as well as

A Shocking Peek Inside the Seedy World of Debt Settlement Companies by Avvo.

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