Read short descriptions about these options below, or read the entire article on How to Avoid Foreclosure.

Bankruptcy. This is not as bad for your credit as you might think, and it has some real advantages.

A bankruptcy court judge can take all the old mortgage arrears and package them up into one debt, and eliminate or significantly reduce your credit card debt. Giving you manageable monthly payments and the ability to keep your home.

One person I have talked to was able to make monthly mortgage payments OR her monthly credit card payments (she had $30,000 in credit card debt), but not both. For her, a bankruptcy filing makes a lot of sense. It could eliminate her credit card debt and leave her solvent, able to make her monthly payments on her mortgage.

Bankruptcy will get the mortgage company’s attention and can prevent foreclosure. Even if the auction date has been set and is coming up soon, everything stops when you file bankruptcy.

“Cram-downs.” For many people, the only way the mortgage can be paid is if the terms are changed. Either the principle has to be lowered or the interest rate changed – or both. The nickname for this is a “cram-down.” This is done through negotiation.

The good news is that you can get help with these cram-downs. There are local organizations in every state, financed by HUD, that will help you with foreclosure prevention. http://www.hud.gov/offices/hsg/sfh/hcc/hcs.cf

There is also at least one national organization offering to help you avoid foreclosure: Homeownership Preservation Foundation, (”HPF”). Both the H.O.M.E. and HPF counseling services are available to any consumer who is facing a possible foreclosure of their home mortgage. Dial 888-995-HOPE (4673) — or www.995hope.org. All assistance is free.

Do not do this without help. The lenders are really hard to deal with, partly because the company administering the mortgage has probably sold it off already and they have no reason to try to keep the mortgage in force. Often the only way they get paid is when they do the foreclosure. A true story from a foreclosure prevention agency illustrates how stupid this can be.

A man with a $495,000 mortgage could not make his payments so he went to a local HUD-sponsored foreclosure prevention agency. The agency figured out that he could afford no more than a $389,000 mortgage and got him approval for that much. They then went to the company administering the mortgage, and asked them to reduce the balance to $389,000.

The company turned them down and went ahead with the foreclosure. They ended up buying the house at auction for the outstanding mortgage of $495,000. They then listed it with a broker who sold it for $265,000! (They could have had $389,000 from the original owner, remember.) But they did not own any part of the principle, and did not care.

In the end, the original owner bought the house back for $275,000! He got a much better deal than he was willing to make, but he did have to go through the whole foreclosure mess.

Read the entire article on How to Avoid Foreclosure.

There are, of course, illegal ways to avoid the down payment. Commonly the seller inflates the price of the property by 5% or so above the mortgage amount, and does not collect the extra from the seller. The FHA is on to this and it is harder to do without getting caught.

So, some clever schemers have come up with a legal way to do something similar. They get a charity to donate the 3% down to the buyer, and donate that amount to the charity. This is called “down payment assistance.”

Nehemiah Corporation of America is the leading provider of down payment assistance and they say they have 95,000 customers (or sellers), both individuals and companies, that have used their services to provide no down payments loans to home buyers.

The FHA is worried that these loans will have a much higher default rate than loans with real down payments and they and some Congressman are trying to make this program illegal. But some powerful Congressman, including Rep. Barney Frank, Chair of House Finance Committee, favor it, and it appears that it may be modified but not eliminated.

However, should you want to take advantage of this program, might be prudent not to wait.

Well, now they are trying again. They are announcing a new agreement with major lenders that they say will make the whole process easier.

Here are some of the important parts of the agreement:

1. They promise answers within five days on some proposals.
2. They will no longer allow the holder of a second mortgage to sink a deal with the primary mortgage holder, something that has been a real problem.
3. If nothing can be worked out to save the home for the owners, they will allow a “short sale” instead of foreclosing. Under a short sale the owner sells the house for current market value, even though that is less than the outstanding mortgages and the lenders forgive the difference. This is much better for your credit, and your nerves, than a foreclosure.

The bad news is that, under current law, most debt forgiveness, has its own big problem: taxes. Except in certain circumstances, when your lender forgives some part of your loan — by lowering the principle, for example - you are liable for taxes on that amount! You could owe the government thousands of dollars.

Many consumer groups and major unions are lobbying heavily to fix this problem. They are pushing to get Congress to pass the Mortgage Forgiveness Debt Relief Act of 2007. Let’s hope they succeed soon!

The oldest and largest association of self-help debt groups in America is Debtors Anonymous, a so-called twelve-step program modeled on the principles developed initially for Alcoholics Anonymous. Their web site is “www.debtorsanonymous.org.” It has a lot of information, including connections to meetings around the country. If there is no meeting near you, then you might join one of their online or phone meetings. They have a list.

If you want something different, there is a web site that lets you find meetings or groups by subject: www.meetup.com. I checked it out and found very few meetings on the subject of debt. There was someone within 30 miles of my town who wanted to find other people to start a group. You’ll have better luck at Debtors Anonymous.

As we have written elsewhere on this site, you have several options when dealing with credit card companies, depending on the problem.

If you have a problem with a charge you think is wrong, there is a federally mandated procedure for the company to resolve it that works pretty well.

If you have problem with a charge made by the company (like a late charge) the best thing to do is talk to a supervisor and if they do not give you satisfaction, threaten to change credit card companies. They do no like cancellations.

If you are having trouble making your payments, and you feel you want to pay them off, you can try talking to their “account retention” department, but you might be better off going to a local Consumer Credit Counseling office and creating a “Debt Management Plan (DMP).” They can usually get significant reductions in interest and late payment charges and arrange a monthly payment you can afford.

If Consumer Credit Counseling cannot work something out then you should talk to a bankruptcy attorney. Depending on your circumstances they can wipe out your credit card debt, or let you pay it off at 10-15 cents on the dollar.

Medical debt is the single biggest reason people file bankruptcy, and if your debt is beyond your means to repay I strongly suggest that you talk to a bankruptcy lawyer.

If you think you can pay off your debt (or at least some of it), NEVER try to negotiate a settlement with the collection agency. In my experience they will not negotiate in good faith. They will give you the impression that they will go away if you give them something, but they won’t. They just keep coming back for more.

And even if they do negotiate in good faith they will not be as easy to work with as the original creditor. If you are being hounded by a debt collector for a debt (of any kind) that you want to pay off at some reduced amount, my advice is to send a “cease and desist” letter (example of cease and desist letter) to the debt collector and tell them that you will negotiate the debt with the original creditor. Then call the original creditor and tell them that while you cannot afford to pay everything, you want to work something out. They will be a lot easier to deal with.

With a Rex Agreement you sell some part of the future equity growth in your house, which must be a free-standing. single family home in which you live. The ratios are flexible depending partly on the value of your house and the percent of future equity growth you are willing to sell, but a typical figure would be 13% of your current house value in return for 50% of equity growth.

So, if your house is worth, says $300,000, you might get $39,000 in cash, and when you sell your house, Rex would get one half of everything you sell it for above $300,000.

If you use your advance to pay off debt (credit card debt or a mortgage); and reduce your monthly payments, this could be a reasonable good deal (as long as you don’t turn around and get new debt). But if you are just going to use the money for living expenses, you might be setting yourself up for worse problems later when the money runs out. Don’t rush into this without comparing it to alternatives like reverse mortgages.

As Barney Frank argued, everyone would take a “haircut” in bankruptcy court, but the alternative, foreclosure, would be much worse. Under foreclosure, the borrower loses their house, the community gets one more empty house subject to vandalism, and the lender loses (on average) from $50,000 to $100,000. I think his plan would be better for everyone.

For reasons that are not clear to me, the lenders fought the bankruptcy court plan, and the administration threatened a veto. Since then, Congress has been trying to cobble together a plan that the administration would sign off on. The Senate and the House have come up with different plans, that now have to be reconciled, but they both have the same primary features: The lender lowers the mortgage to a point that is below the current market value of the house, giving some equity to the borrower. Then the FHA guarantees the new mortgage.

This is a pretty good deal for the lenders, but they are not getting behind it in any numbers, and the administration is still making noise about a veto because it would use tax dollars (of an unknown amount) to cover those loans that go bad under the new system, although they are now showing signs of being willing to make a deal.

And the dance goes on. It makes no sense to me that the administration would kill the Frank bankruptcy plan, which could accomplish the same end without any use of tax dollars and approve a plan that could cost the government billions of dollars.

1. Credit card companies are no longer allowed to increase the percentage rate on outstanding balances. This means that if your credit rating gets dropped for any reason, or you get into arrears on other debt, the credit card company cannot decide to raise your interest rate on charges you have already made. They CAN raise your rate on future purchases, but not on current balances. (If you fall into arrears on your credit card debt, they may also be able to raise interest on past due balances.)

2. They cannot apply your payment only to low interest balances. If you have different rates on different balances (this typically happens when you transfer old balances from one card to another at a low — or even zero — rate and then go on to charge new items), the credit card companies usually apply all of your payments to the lowest interest balance. From now on, when you make a payment on your bill, the company can charge it off to the highest interest balance, or it can allocate your payment equally across all balances. (If you have one of those “zero interest on transferred balances” come-ons in your mail box, now would be a good time to send it in.)

There are other provisions such as one that requires companies to make sure you have at least 21 days after you get the bill to make your payment. We don’t know how many of these will survive the comment period.

Credit card interest rates go as high as 35% in many cases because the companies have found their way around state laws limiting interest rates. Any regulation has to come from the federal government, which now seems to be doing something to protect cardholders.

I do not know how well this will work. It all depends on the terms. But add it to the list of foreclosure programs we have talked about in these blog entries, some of which are still being negotiated between Congress and the administration. There are also things going on in the various states, which you should check into. Massachusetts for example, has just started a new 90-day period between notification and foreclosure.

There is just one “rule” that applies to nearly everyone who is having a problem meeting their mortgage obligations: Start talking to your lender about options. This may not be easy. You will usually end up in “press number..” hell, but it is worth trying. Use registered letters. Email. Phone calls. Get someone with authority on the phone and ask them about options.

There is also help at many state agencies and organizations, and one national non profit: Homeownership Preservation Foundation, (”HPF”). HPF’s counseling service is available to any consumer who is facing a possible foreclosure of their home mortgage.
Founded in 2004, HPF was founded specifically to help Americans avoid foreclosure. HPF operates a national help line that offers homeowners personalized assistance. This line is open 24 hours a day, 7 days a week. Dial 888-995-HOPE (4673) or you can reach them on the Internet at www.995hope.org.