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By LIZ PULLIAM WESTON
In Some Cases, Debt Settlement Can Be The Best of Bad Options
Dear Liz: I have $175,000 in credit card debt. Almost all of this debt was due to balance transfer offers over the years which I managed quite well to make sure I had no balances with high interest rates. Now with credit being so tight, one of my issuers has reduced my credit limits and I can't find any balance transfer offers to extend my low rates. Will the issuers allow me to settle this debt for less than I owe? I always get offers from credit consolidation companies that tell me banks are willing to accept 50% or less of your balance if you pay the reduced balance amount in full. Can I simply call up the credit card company and offer a reduced amount? If I cash out on my stocks and other investments, I could actually pay the debt off in full so I do have the ability to pay. I just never did so since the interest rates were so low.Answer: The recession has made credit card issuers more willing to accept debt settlement offers, but your savings will come at your credit scores' expense.
Card issuers really don't like it when people don't pay what they owe. When the notation of a debt settlement hits your credit reports, expect your scores to dive.
Some people have little choice but to accept this price. They can't pay their debt and, for whatever reason, can't wipe it out in bankruptcy court. In those cases, debt settlement can be the best of bad options.
You, however, have a choice. Don't make one you'll regret.
Dear Liz: What percentage of after-tax income should be spent on housing, transportation, food, communication (TV, phone, internet), medical, other debt, insurance and other miscellaneous essential expenses?
Answer: There aren't any hard-and-fast rules, since families have vastly different circumstances.
But I do like the rules of thumb outlined in bankruptcy expert Elizabeth Warren's book, “All Your Worth.” She recommends limiting “must have” expenses—housing, transportation, utilities, food, insurance, child care and minimum debt payments—to 50% of your after-tax income.
That leaves 30% of your pay to be spent on “wants,” including clothing, vacations and entertainment, and 20% for savings and debt repayment.
There are times when keeping your must-haves to 50% will be tough, such as after a layoff (when your income is reduced) or the birth of a child (when expenses rise and income often drops, at least temporarily, due to maternity leave).
As a general guideline, though, limiting your overhead will help you survive financial setbacks while ensuring you have enough left over to enjoy your life and save for your future.
Dear Liz: I seem to be in a "Catch-22" situation. My mortgage refinancing was about to close when the lender backed out because I live in a geodesic dome home and there are no comparable sales for domes in my area. I've tried to find another lender but none will finance a dome because there are no similar homes to gauge the value. I feel that I am being discriminated against because my house has a rounded roof over part of it, instead of a flat or peaked roof. My broker suggested that I get a reverse mortgage since this does not require comps. However, I do not want to go down that road. Do you have any ideas of what I can do to refinance, now that I've lost the low rate I was locked into?
Answer: In the real estate boom, lenders stopped worrying so much about little niceties like accurate appraisals. With the credit crunch, lenders are suddenly obsessed with appraisals, which typically require comparable sales.
"The problem with this is that there is no way to come up with a realistic estimate of value for properties with unusual construction type because there are rarely comparable sales," said Dick Lepre, a senior loan officer at RPM Mortgage. "This includes domes, log homes and straw bale construction."
What you need to find, Lepre said, is a local bank that intends to hang on to the mortgage, rather than sell it to investors. These lenders tend to be more flexible, but there's no guarantee you'll be able to find one willing to refinance your loan.
"Your situation should serve as a warning to anyone who's considering buying an unusual home", Lepre said.
"Anyone purchasing a home with any of these construction types should understand that mortgages are and will always be difficult and [that] it is a lot harder to find buyers," Lepre said. "It is harder to find buyers because there are a limited number of people who want to live in such homes and also because it is harder for those buyers to find financing."
Liz Pulliam Weston is the author of the book "Your Credit Score: Your Money and What's at Stake." Questions for possible inclusion in her column may be sent to 3940 Laurel Canyon Blvd., No. 238, Studio City, CA 91604, or via the "Contact Liz" form at www.asklizweston.com. Distributed by No More Red Inc.
