Up for the quarter, down for the year? See what's happening with home affordability in our latest "Income you need to buy a home in the top 50 metro areas".

Up for the quarter, down for the year? See what's happening with home affordability in our latest "Income you need to buy a home in the top 50 metro areas".

Got debt? Try a home equity loan to wipe it away

If you have more debt than you can handle, you may be able to qualify for a home equity loan to consolidate your payments and lower your interest cost. You may even be able to use the home equity proceeds to settle your debt altogether.

Get a home equity loan before it's too late

Too many people manage their money from paycheck to paycheck; spending everything they earn but still managing to maintain a decent credit rating. But life has a way of throwing unforeseen things your way that can throw your whole system out of balance. If you're lucky, there is some warning -- you know that big medical expense is going to eventually end up in collections, that soon you won't be able to make the minimum payment on your credit cards, or that your mortgage rate is going up and that means less money for other bills. It's important to take action before your finances go down the toilet. It's time to set up a home equity loan or line of credit before things go seriously wrong.

If your debt gets out of hand, a home equity loan can be used to consolidate your higher interest debt, making payments more manageable. But if that's not enough, it can also be used to make debt go away entirely.

Debt settlement: When your back is against the wall

Suppose you have $50,000 of credit card or other unsecured debt like medical bills. What if you can only get a $25,000 home equity loan, either because that's all the equity you have in your home or because you can't qualify for a higher loan payment? If your total payments remain too high while your mortgage debt is increased, you could be in greater danger of foreclosure. But what if you could use the $25,000 home equity loan to retire $50,000 of debt? 

Dangers of debt settlement firms

Debt settlement firms all use a similar strategy. They have you stop making payments to your creditors, and instead funnel the missed payments into a savings account (often an account that they control). They charge very high fees to do this, in some cases as much as 25 percent of the total balances to be settled. There is no guarantee of success, but the attempt can be as ruinous to your credit as a bankruptcy. In addition, you get to deal with your creditors calling every day for months while the savings is amassed. Then, the settlement company calls your creditors and tries to get them to settle for less than the full balances to consider your account paid in full.

DIY debt settlement

A home equity loan or line of credit allows you to save your credit rating, because you don't need to skip payments and funnel the payments into a savings account. It goes without saying that you're in a better position to negotiate your debt before you stop making payments.

Another strategy is to simply call the creditors one by one, explaining that you are undergoing a hardship which is making it impossible for you to continue making your payments. Explain that you can pay a portion of the outstanding balance in exchange for a full settlement and no derogatory notation on your credit report. Ask for a letter accepting your offer and explain that you will not send any money until you receive it. Make it clear that you have a limited amount of money available to satisfy several creditors, and that those who accept first are more likely to be paid. Also explain that you are considering bankruptcy if settlement doesn't work (in the case of bankruptcy, the creditor will receive nothing).

The letter campaign

Those who prefer to avoid confronting the creditors over the phone, and who are willing to wait longer for results, can try the letter writing technique. The letter you use should be similar to this:

Dear Creditor,
Re: Account Number__________

This letter contains a proposal regarding settlement of my account in full.

I am experiencing a financial hardship and will not be able to continue making payments on my unsecured debts (attach documentation supporting hardship as applicable). However, I do have some limited assets and am willing to direct them toward satisfying my obligations as best I can.

The amount that I can pay in order to settle the debt is full is $____________. I also ask that you not add a negative entry on the account to my credit report.

I am negotiating several creditors and have so far reached an agreement for settlement with two of them. However, every creditor that accepts a settlement leaves less money available to pay the others. If everyone agrees to these terms I expect to be able to pay them all.

Once I receive a signed acceptance letter agreeing to the above terms, I shall remit the amount as stated above.

Yours truly,

Your signature
Your name

Understand the repercussions

Even if you're successful at settling your debt, you aren't out of the woods yet. The forgiven amounts are considered taxable income to you by the IRS. Additionally, if the settlement doesn't take, your financial position worsens and you end up in bankruptcy, you will have given up home equity (which can be protected in bankruptcy proceedings) to pay off unsecured debt (which could have been discharged in a bankruptcy).

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