Here on the ReadyForZero Blog we always strive to share insights related to debt that you can’t get anywhere else. We recently talked with Ruben, a ReadyForZero user who found us via the Debt Movement and he told us about his experience settling a HELOC (Home Equity Line of Credit).
Since that is exactly the type of situation that is not often discussed on blogs or news websites, we asked if he’d be willing to share his experience with our readers in the hopes that it can help others who may be in a similar situation. While attempting to settle a debt does not always result in a positive outcome, it can be a powerful tool to use in the right situations. And we’re glad that in Ruben’s case it worked very well. Below, he explains what the process was like:
Can you describe briefly the events that led up to your decision to pursue a settlement of your HELOC?
Prior to the Debt Movement, I never knew settlement was an option. But as I was going from blog to blog learning about finances, I came across SecondMortgageAdvice.com and, after doing some digging to make sure it was legit, I paid for a 1 hour phone consultation with the person who runs that site, Charles Phelan, who was a guest on a podcast by Gerri Detweiler of Credit.com. I would’ve never run into these sites had it not been for the Debt Movement.
When you decided to pursue settlement, how did you get started? Did you have to do a lot of research? Did you think about using a settlement company or did you want to just do it on your own?
I started drafting questions to ask Charles Phelan, to get the most out of that 1 hour consultation, and he offered me advice that was specific to California that I didn’t know before. For example, he let me know about California’s “one action rule” which meant a lender couldn’t sue me unless they tried to foreclose first. Since the lender in this case was for an underwater HELOC, chances were high they wouldn’t foreclose anyway since they’d be left with nothing. Knowing this gave me additional leverage for negotiation.
Once you actually began, what was the process like? What was it like to communicate with the lender about settling (and negotiating) the loan?
I wrote a letter to the lender requesting a small settlement of around $6k (at the time, the HELOC balance was $65k), the main purpose of the letter being to get the ‘ball rolling.’ I should note that the HELOC was technically in collections (and was showing up on my credit report as a collection), so my main contact was a collection account manager at the lender. However, I didn’t hear back and after a month I followed up with him directly. He seemed unaware of the situation until digging up my letter, but refused to work with me. Knowing the “one action” rule, I let the account manager know that I would cease all payments until they could work with me (I was making “micro” payments at the time of $140/month), and he seemed indifferent. There was almost no communication from the lender until 3 months later when he was replaced with a different account manager who seemed more willing to work with me and was upfront about the process. Within 1 week of speaking with the new account manager, we had agreed to a settlement of $15k. While I waited to receive their offer in writing, my wife and I used up $4k from an emergency fund and took $11k as a withdrawal of our Roth IRA contributions (so it wouldn’t be taxed). Normally we would resist taking funds out of retirement, but in this case we made an exception because of the relatively large benefit, and we agreed to increase our Roth contributions going forward to make up for the loss.
Are you happy with how it worked out? Did you feel a sense of relief once it was over?
It was definitely a relief, especially because this was settled in 2013 where the cancellation of debt would not be federally taxable to us since the entire HELOC was used for home purchase. And being able to get rid of a $65k debt for only $15k not only feels pretty good, but made our underwater house less underwater. Right now, we’re left with only a primary mortgage, and although it’s still underwater by $100k, it’s much better than at its peak when it was underwater by more than $200k.
What advice would you give to someone else who was thinking about settling their debt?
Knowledge is leverage. Learning advice that was specific to my state and specific to my situation helped give me additional leverage. I was skeptical in seeking paid advice, but felt better after doing my due diligence to make sure I wasn’t entering a scam. The information I got was valuable. I ended up paying $150 for advice that saved me $50,000. I don’t mean to sound like a salesman though — not every situation requires paid advice. But if the stakes are high (as I felt they were in my case), I think sound advice can be worth the money. As I continue to pay off my debt, I find personal stories motivate me, so I hope my story is helpful to others.
No doubt it will be! Thank you again, Ruben.