Strategy for Settling Your 2nd Loan
To start with, if you intend to keep your house and cannot afford to keep paying both the 1st and 2nd, your priority is to keep your 1st current. An important and generally accepted rule is this. A property owner should not deal with his/her 2nd lender until after the 1st loan has been permanently handled.
Your 2nd lender, often being totally underwater, and hence "out of the money" won't foreclose. So, forget about your 2nd for a while, e.g. at least 6 months, but almost always much much longer. Here's the deal. Should you want a reasonable settlement, you'll need to follow a certain strategy. If you try to play by the lender’s rules, you may be able to settle sooner, but you will pay a lot more. If you have a good reason to be in a hurry (“just to get it done and move on” isn’t a good reason), then by all means reach out to your lender, but be prepared to jump through hoops, and to ultimately pay a lot more. However, to achieve a more palatable settlement, the process will require a smart strategy and patience, as it will most likely be a process lasting, at a minimum, six months, but often as long as several years.
Key settlement guidelines:
1) First, stop paying on your 2nd loan and have no more communication with them, by either phone or mail. That’s right. When you see your lender’s collections dept on your caller ID, do not answer the phone, and do not return any voicemail messages. The first three or four months, you’ll likely receive many calls from the lender’s collections dept. Please just ignore them. FYI, many forum members have learned how to deal with lots of incoming collections calls from all sorts of creditors. You’ll figure out what’s best for you.
2) It’s irrelevant whether your lender charges off and/or sells your 2nd/HELOC to a debt buyer or not. Makes no difference whatsoever, so ignore it. If, in fact, the debt is sold to a new entity, and you receive a letter from the new owner, DO NOT bother sending a debt validation letter. It accomplishes nothing for you, does not affect your legal standing, and is generally a waste of time and effort. Plus, it signals to the debt owner that they have the correct address, and that you, as a debtor, are concerned, stressed, and naive enough to send it. BTW, a new debt owner is required, under the provisions of the FDCPA, to send a letter to the debtor advising them, among other things, of their right to have the debt validated. Means nothing, so forget about it.
3) When, eventually, you engage in settlement discussions with the lender’s recovery department (no, not the collections dept), you will most likely be asked some prying questions, and be asked to disclose financials. Politely refuse to discuss these. DO NOT disclose any personal info, to include your plans, and absolutely no financial or employment info. One member posted that his attorney quipped that giving financial info to a creditor is akin to “pre-judgment discovery.” A creditor doesn’t need that stuff in order to make you an offer. As the oft repeated maxim states, “knowledge is power.” And, as in the following humorous age old buyer-seller exchange. Buyer (Borrower): “How much do you want?” Seller (Lender): “How much you got?”
4) Some key negotiation guidelines:
a) Set your settlement goal, including the price and all the other conditions. Needless to say, do not share your goal with the lender. FYI, settlements are commonly achieved at prices in the range of 5-10 percent of the loan balance. The lowest I’ve seen is 2 percent; that settlement having been achieved via shrewd, hard-nosed bargaining by the borrower.
b) Do not rush the settlement proceedings, to include commencing negotiation talks. Let the lender’s settlement department initiate the talks, which can range from a minimum of 6 months (very rare) to as long as several years. Be patient. Time is on your side and the passage of time will only strengthen you position.
c) Do not behave as if you are rushed, eager, or worried at all. Instead behave in a very nonchalant manner, with a couldn’t care less attitude. Be prepared to walk away from the settlement talks at any time. Don’t worry, the debt’s not going away, and negotiations can be resumed later. Wait for the lender to initiate re-engagement in the negotiations.
d) When the lender’s settlement department contacts you, most likely after many months, they will leave a voicemail implying there may be a “workout” available for you. Return that call and listen to their offer. This means that lender is now motivated to reach a reasonable settlement, and may be glad to eke out any money on this loan.
e) Never accept the first offer. Instead counter the offer with a counter below your goal price. And, then off you go with your negotiations. Remember this negotiation basic. When the lender asks you to give up something, ask them what they’re willing to offer in return.
f) Avoid talking much, only enough to present you offers (counter offers), and to confirm and verify the lender’s offer. No idle chit chat, and never disclose personal info. Your negotiating opponent will likely be a trained negotiator.
g) While I realize this seems obvious and goes without saying, DO NOT end up negotiating with yourself. This frequently occurs when a negotiator is overly loquacious and attempts to be pleasant and polite to their negotiating opponent. The result is often giving something away, leaving something on the table.
h) It’s prudent to sleep on an offer before accepting or countering it, even for one that initially looks perfectly acceptable to you.
Notice about your credit: Yes, your credit will be damaged in the process, and unless your lender agrees to credit bargain as part of the settlement, the derog can remain on the credit file for up to 7.5 years in accordance with the provisions of the FCRA.
BK Dischargees: Since federal law prohibits a creditor from contacting the debtor for collection purposes, it’s imperative that the bankruptee mail a letter to the 2nd lender authorizing that lender to contact you to settle. Subsequent to that letter, it's recommended no more contact be made with the lender until a settlement offer is proffered by them.