John Ulzheimer, our resident credit expert and scoring guru answers your tough questions. This week John answers your questions about underwater mortgages, strategic default and overwhelming credit card debt.
Question: What should I do if my home is worth 22% of the current loan balance? Should I walk away?
That’s an almost unbelievable drop in value. I would normally start with trying to short sell the house but the value is so far off from the loan balance that I can’t imagine any lender willingly accepting an offer at 22% of the balance.
You have to make a difficult choice. You can stay in the house and essentially rent it (no equity, maybe ever), or you can walk away from it (strategic default). I would say that if you cannot afford the payments to turn your keys back over to the lender and walk away. Don’t be tempted to “go down with the ship” or break into your 401K savings to afford the payment.
Question: What do I do if I have thousands due on one of my credit cards? I was unable to make the payments and it was turned over to collections, and it hurt my credit scores. I’d like to ask for a settlement compromise. Who do I pay, the credit card company or the collectors?
This is an all too common situation right now and it can be confusing to determine who to pay since your card issuer attempted to collect for months and now some other company is calling you for payment. It’s too late to pay the credit card company. Once they consign or sell the debt to a collection agency they’ve washed their hands of you. Your only option is to deal with the collection agency now.
I’d suggest offering a settlement of about 20% of the balance as a starting point. And remember, they can see your credit report so they’ll know if you have other credit cards that you can use to pay them.
For a more information about debt settlement and your options, see Credit.com’s “Consumer Guide to Debt Settlement.”
If you have a tough credit related question that you need an answer to, post it in the comment section below, or send us an email and we’ll be sure to cover the topic in an upcoming post.