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Qualifying For Mortgage After Debt Settlement Versus Bankruptcy

Qualifying For Mortgage After Debt Settlement Versus Bankruptcy

This BLOG On Qualifying For Mortgage After Debt Settlement Versus Bankruptcy Was UPDATED On March 2nd, 2019

Debt settlement is when a consumer negotiates the terms and repayment of their debt. Due to being behind on their debts due to job loss or other extenuating circumstances which caused a major reduction in their household income where they can no longer afford the terms of the original payment plan, many consumers opt for debt settlement versus bankruptcy.

  • Debt settlement can be risky because not only can it devastate one’s credit scores but sometimes it will deepen the debtor’s debt
  • There are thousands of debt settlement companies who are reputable and do the very best for their clients
  • But as with any industries, there are scammers also who prey on those who are in financial trouble
  • Be aware of debt settlement companies who ask fo large deposits up front and check on their references before hiring them

Restructuring Through Qualifying For Mortgage After Debt Settlement Versus Bankruptcy

The basics of debt settlement versus bankruptcy are paying off the debt consumers owes creditors for less than the face value of the debt. The debt with debt settlement versus bankruptcy is paying creditors either at once or in multiple installments.

  • These debts are normally credit card debts and medical debts
  • Other debts like turning in auto because consumers can no longer afford the payment and owing a deficit also fall into the debt settlement category
  • Consumers do not have to hire a debt settlement company
  • Anything a debt settlement company does, consumers can do it on their own
  • A debt settlement company is a middle man between consumers and the creditor
  • Debt settlement companies are not cheap

Mortgage After Debt Settlement Versus Bankruptcy Process

The debt settlement process is when a consumer is overwhelmed with debt and can no longer meet paying his or her debt and is contemplating bankruptcy or debt settlement.

  • The consumer can hire a debt settlement company
  • The debt settlement company will then act on the client’s behalf in representing consumers to the creditors
  • Most likely tell the creditor that the debtor is on the verge of bankruptcy so the creditor is more likely to settle
  • Consumers can convince to the creditor that they are likely a potential charge off, the creditor is very likely to settle 
  • Many debt settlement companies will most likely advise stopping making payments
  • A reputable debt settlement company may establish an escrow account for consumers
  • The company will recommend to pay them a portion of a paycheck
  • They may hold it in escrow so the creditor finally agree on a dollar amount
  • The escrow account will have enough of a lump sum to offer them as a settlement
  • I strongly advise anyone against giving anyone a portion of their paycheck every month
  • Tell the debt settlement company that consumer will be saving portions of a paycheck and save the money themselves on a separate account to get ready for a lump settlement
  • There are no guarantees that debt will be settled
  • Statistics prove that over 75% of debts are never settled so the odds are against consumers
  • Remember that conmers can settle own debt instead of hiring a debt settlement company

Be Cautious Of Debt Structuring Companies

Debt restructuring companies are not allowed and it is against the law to charge up front fees for services not performed.

  • The Federal Trade Commission has forbidden the charging of upfront fees to debt relief companies back in 2010
  • Most debt restructuring companies will charge consumers a percentage of the debt they save 
  • Normally they will charge you 20% of the debt they save 
  • If they charge consumers more than 50% of the debt they save, they are charging too much
  • Some debt assistance companies try to find a loophole in charging consumers upfront fees by calling the upfront fee as a processing fee, which is not illegal but is actually an upfront fee
  • Debt settlement companies will probably charge a monthly fee to be part of their debt restructuring program as well

Taxed On Forgiven Debt

Another thing consumers need to consider is that forgiven debt and/or write-offs can be classified as income and may be liable to pay income tax on the debt forgiveness.

  • Consumers need to consult a tax advisor or accountant
  • With the combination of paying a debt settlement company and the potential of paying taxes on the forgiven debt
  • Consumers may want to think twice on hiring a debt assistance service
  • Whatever a debt restructuring company service can do, the consumer can do it themselves
  • There are many free  Do It Yourself  debt assistance informational materials available

Many Mortgage Lenders Consider Debt Settlement Worse Than Bankruptcy

There are many mortgage lenders that really frown upon mortgage borrowers who had prior debt restructuring done.

  • They sometimes view settlement on debts worse than bankruptcy
  • This is because, with bankruptcy, they cannot refile bankruptcy for another 7 years
  • Whereas settlement of debts, they can easily file bankruptcy anytime
  • Many disagree with folks with their mentality on their views of debt restructuring and settlement
  • There are lenders who just regard debt settlement as a period of financial hardship

Borrowers who had a prior debt settlement and need to qualify for a mortgage after debt settlement versus bankruptcy, please contact The Gustan Cho Team at Loan Cabin at 262-716-8151 or text us for faster response. Or email us at gcho@loancabin.com. Gustan Cho Associates at Loan Cabin Inc. is a national five-star direct lender with no mortgage overlays on government and conventional loans.

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