We have been offered a 10-year settlement plan but, with our situation I don't know if that is the best option.
My wife and I were forced to sell our home through a short sale. Our first mortgage was paid in full. Our second mortgage with Bank of America received 24k out of 90K leaving us a charge-off of 66k. This is the only negative thing we have on our credit. We live in the state of Pennsylvania and are currently renting. We would like to be able to buy a house again someday. So, here is my question, Bank of America is offering us a 10-year settlement plan of $220 a month and a 1099 for the rest at the end of the 10 year period. However, from everything I have read, in PA (1) they cannot garnish our wages (2) we have no savings for them to come after and (3) charge-offs only last 7 years on a credit report. So, it would almost seem like not paying has a better impact than paying, right? Because, if I am understanding this correctly, if we took the offer, the impact of the charge-off could last as long as 17 years (7 years past the end of the payment plan). And, I am afraid of the 1099 at year number 10. I know we are eligible for the Mortgage Forgiveness Act, but am not sure if that would last for 10 years. What do you think?
You have put some thought and study into your situation. With a $220/month payment for 10 years on a $66,000 deficiency balance, Bank of America is willing to eat $40,000 in losses, and then 1099 you for the $40,000. Today, under the Mortgage Forgiveness Debt Relief Act of 2007, debt is forgiven when incurred in years 2007 through 2012 under certain circumstances. I think you are right to be somewhat suspicious that the administration in power in 2019 will be as forgiving as the present one, but I don't think that should be your primary concern.
Let's look at your bullet points.
1) Under Pennsylvania law, your wages are exempt from garnishment, but your bank accounts are not. If your creditors are tenacious and seize your bank accounts, your may end up living an entirely cash existence. People do that for various reasons, but it can be inconvenient. Check with an attorney who specializes in bankruptcy law to find how prevalent bank account seizures are in Pennsylvania.
2) You may not have savings now, but if you hope to buy a house in the future and want to take advantage of the miracle of compound interest, then you will either need an account in a Cayman Islands bank or some extra-legal means of saving money in your name in the US.
3) Charge-offs are supposed to disappear after seven years, but collection calls can continue for long after. Bear in mind the annoyance factor of collection calls and letters when tallying the cost of walking away from a debt.
Let's say you take Bank of America's offer. It's a ding on your credit, yes, but it's not as bad as a foreclosure. While you repay Bank of America you can rebuild your FICO score, start saving for a down-payment, and when the Bank of America debt is retired in 10 years you may have enough saved (because your bank accounts were not garnished) and a decent enough credit history that you find a lender willing to sell you a mortgage.
See this article to learn more about your FICO score calculation to see what I mean about the importance of recent credit activity.
Of course, this is your call and you may have other facts to consider. In my opinion, your case for not taking the Bank of America deal isn't as clear-cut as your argument suggests.
I hope this information helps you Find. Learn & Save.
Did you know?
Debt is used to buy a home, pay for bills, buy a car, or pay for a college education. According to the NY Federal Reserve total household debt as of Q2 2022 was $16.15 trillion. Auto loan debt was $1.50 trillion and credit card was $0.89 trillion.
According to data gathered by Urban.org from a sample of credit reports, about 26% of people in the US have some kind of debt in collections. The median debt in collections is $1,739. Student loans and auto loans are common types of debt. Of people holding student debt, approximately 8% had student loans in collections. The national Auto/Retail debt delinquency rate was 4%.
The amount of debt and debt in collections vary by state. For example, in Montana, 20% have any kind of debt in collections and the median debt in collections is $1589. Medical debt is common and 11% have that in collections. The median medical debt in collections is $702.
Avoiding collections isn’t always possible. A sudden loss of employment, death in the family, or sickness can lead to financial hardship. Fortunately, there are many ways to deal with debt including an aggressive payment plan, debt consolidation loan, or a negotiated settlement.