Written by Christopher Reed in Loans
Viewed by 154 readers since 12-07-2008

In the not too distant past, people who were deep in financial debt are at the mercy of lenders. Lenders were so generous in granting any amount of loan. However, if you miss out in your payments, you won’t find them eager to work out your problem with you.

Lenders find it more convenient to charge off old accounts as bad debts than help you out with a repayment plan. Today, lenders want to steer clear of foreclosures and other legal proceeding every way they can. Lenders are seeing things in a different light and have begun humming a new tune.

An economy in decline, the worsening financial crunch and rising default rates called for a new set of rules. Here are some reasons why lenders are changing their perspective:

• Delinquent payments charged off as bad debts rose from last year’s 3.85% to 5.47% today.
• In October alone, filing of bankruptcy reached the 100,000 mark, a whopping 40% increase from last year, and the highest reached since October 2005.
• There are at least 2.2 million home owners who are behind their mortgage payments for more than 60 days. Around 15% of homeowners owes a lot more in home payments than the house’s actual worth.
• As home prices drop sharply, each foreclosure today equates to a 44% decrease from the original loan amount. According to data from LPS Applied Analytics, this figure rose from 29% just a year ago.

These are some of the reasons why lenders are encouraging borrowers to pay back their debts, even if they have to absolve borrowers from some of it.

New Programs for Debt Strugglers

A popular new program announced by government agencies will pay $800 to mortgage companies for every loan they restructure for the borrower. To ease the burden of borrowers in their debt payments, government agencies sought the participation of lending associations to assure the new program’s success. Some beneficial provisions put into place are:

• Reduced interest rates. Borrowers don’t need to pay beyond 38% of their income on housing.
• Loans will have extensions from 30 years to 40 years. A portion of the principal amount can be deferred at zero interest.
• Borrowers who own their homes will be exempt from foreclosures, provided they have steady income and can make lowered mortgage payments.
• Mortgage modifications which include debt reduction or lowered interest rates on loans.
• Loan forgiveness and foreclosure prevention. Participating lenders should agree to bring down the loan principal to 90% of the borrower’s home’s present value.
• Struggling borrowers can, over time, settle their debts for less than what they owe, up to 40% less. The present rules require paying off the full amount owed.

Cutting Some Slack on Student and Car Debts

In response, new debt forgiveness plans are going to be implemented by student and auto loan makers.

• Some portions of federal student loans can be forgiven provided the borrower participates in military service or volunteer work.
• Student loan debts can be forgiven for borrowers who have certain occupations and can make on-time payments for 10 years.
• Auto loan lenders are stepping up their education campaign to inform delinquent borrowers that they are willing to work with the borrowers for repayment plans.

If you are in this dilemma, seek the advice of good credit counseling experts. They can help you work out the solutions and answer some questions about debt forgiveness.