With the current economic downturn, many recently unemployed are struggling to make ends meet. Many of these same individuals were making their debt payments and had good credit scores until they found themselves standing on the unemployment line. Unable to stay current on their mortgage, credit card debt and/or student loans, they are beginning to see their credit scores drop precipitously. At a time when credit is what they need most, they are unable to secure any additional credit. To mitigate this, many are scrambling to modify their debt.
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Home Mortgage Loan Modification
The federal Home Affordable Modification Program offers homeowners struggling to meet their monthly mortgage payments an opportunity to reduce that monthly payment. But at what cost? Like many federal government programs, they are not well thought out. A major stumbling block of the Home Mortgage Loan Modification program is that it does not coordinate with the lenders in the way lenders should report the loan modification to the credit bureaus. As it is currently configured, the program allows lenders to report any loan modification as a "partial payment". Partial payments affect your credit report negatively and could result in a serious hit to your credit score. Borrowers who have entered into a loan modification may find, many months later, that their credit score has dropped 100 points or more. The worst part is that this reporting by lenders will continue until the mortgage is paid off. Until the federal government fixes this overt flaw and introduces much needed changes in how loan modifications are reported, loan modification will continue to be the kiss of death for borrowers credit scores.
Credit Card Debt Settlement
Many recently unemployed are struggling to make their minimum payment on their credit card debt. Unable to even pay the monthly minimums on their credit cards, they are beginning to panic. In an effort to stay financially afloat, they are reaching out to credit card issuers in the hopes of negotiating a reduction in their credit card obligations. Typically this involves securing the services of a credit-counseling agency, who will negotiate a lower rate or lower the amount of debt owed. Participation in a debt-management program may appear on the borrower's credit report but as long as the credit-counseling agency makes the payments on time, it will not affect the individual's FICO score, Fair Isaac says.
Federal Student Loan Payment Options
If you fail to make payments on your federal student loan for nine months, the loan will be considered in default and will likely be turned over to a credit collection agency. Federal student loans are a unique animal in that the federal government has the power to garnish your wages in order to satisfy the debt. They can do this without even having to go to court. Federal student loan debt never goes away. It stays with you until it is paid off. Bankruptcy filing will not relieve you from the debt either. It sticks with you for life. There are things you can do, however, to work out a payment plan with the lender. One is Forbearance. Forbearance allows you to postpone payments or pay a lower amount each month. Forbearance is something that must be agreed to by the lender. During forbearance, interest continues to accrue. A second option is Income-Based Repayment plans. These plans allows borrowers to cap their payments based on their ability to pay. Most borrowers who qualify for this program will never have to pay more than 10% of their income.Those who fall below 150% of the poverty level won't have to make any payments at all. It is a temporary solution, but one that may get you through your period of unemployment. To find out if you qualify you must reach out to your lender. You can learn more about the program Google IBRINFO. The best part about this program is that it does not impair your credit, unless you go into default. So you must comply with the monthly payment terms.
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