Debt Modification Strategies
If you are considering a loan modification, you generally must decide which is
more important to you: maintaining your good credit rating or re-working your
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Many individuals who confer
with me about debt issues, including real property
foreclosures, have already tried to contact creditors in
hopes of reaching some compromise for managing debt on
What they all too often find is
that, unless they are at least two months in payment
arrears, their creditors will not talk to them. In other
words, unless your credit rating is already jeopardized by
slow payments, relief is unavailable. Therefore, it is
virtually impossible to retain a strong credit rating while
negotiating compromises with creditors; instead, only when
credit ratings are made vulnerable can any significant
progress be made in debt reconciliation.
This should continue to be the
case despite the government’s recent expansion of its
program to consider loan modifications of performing loans.
The reasons why the government’s revised policy is likely to
It is a government program.
Lenders have no compelling
reason to follow the urging of the government.
There are no effective
teeth to the policy.
Lenders are notoriously
slow to shift policy, particularly when they see no real
benefit to them.
Many lenders believe, with
some justification, that if they delay taking any
effective action the government will likely throw more
money their way.
vs. Debt Modification
If you are considering a loan modification, you generally must decide
which is more important to you: maintaining your good credit
rating or re-working your debt. As a practical matter, you
cannot simultaneously have both. People who simply cannot
meet their contractual terms really have no choice; they are
forced by existing factors to pursue some form of debt
reformation or reconciliation, even if it means dodging
The variable in this current
economic equation is how a judgment, bankruptcy or
foreclosure may affect one’s credit rating. Fortunately for
many financially distressed people, the consequences of such
actions are less devastating now than in years past.
After concluding that the credit score can be sacrificed for
the sake of survival, the ensuing concerns become practical
and logistical, such as:
how best to maximize asset
protection while weathering the gauntlet of loan modification, or
how to best structure the
nature of assets/debt prior to embarking on loan modification – i.e., shifting from
unsecured debt to secured debt (or vice versa), from
non-exempt assets to exempt assets, etc.
This is not a one-size-fits-all
consideration, as there are always unique factors or
combinations of factors that impact direction and timing of
a course of action. For these and related reasons, I find
myself involved much more these days with
bankruptcy-avoidance planning than with actual bankruptcies,
and with asset protection strategies prior to attempts at
While some individuals await
the government’s unfulfilled promises of economic recovery,
others are implementing their own economic recovery plans. ●