Why lenders might forgive your debt

Student loans and car debt

Meanwhile, makers of student and auto loans haven't announced any new plans for forgiveness. In recent years, in fact, both groups made escaping their debt more difficult. But:

• Certain borrowers can still get portions of their federal student loans forgiven through volunteer work, military service and teaching in low-income communities. And Congress passed a law in 2007 that wipes out federal student loan debt for people who work in certain jobs and who make 10 years of on-time payments. Plus:

• Auto lenders are stepping up their education efforts to let troubled borrowers know they have alternatives if they fall behind on their car payments. According to credit bureau Experian, more than 500,000 borrowers are 30 days or more overdue on a car loan.

Yet fewer than half of consumers in a recent poll knew that auto financing companies often worked with troubled borrowers, said Eric Hoffman, spokesman for the Aware, an education group set up by auto dealers and lenders that commissioned the survey.

Auto lenders may be able to modify a loan to stretch payments over a longer period or allow borrowers to make up missing payments, Hoffman said.

"We tell people, 'Don't ignore the situation if you're having trouble,'" Hoffman said. "Get in contact with your lender and see if there's a way to work out a different payment plan."

The same advice holds true for student loans. You may be eligible for income-sensitive or graduated repayment plans or, if you're facing economic hardship, forbearance or deferment that would allow you to skip payments for up to three years.

Here's what to do about other debt:

Credit cards. If you're already behind on your credit card payments, you shouldn't wait to see if you'll qualify for any loan forgiveness programs. Make two calls: one to a legitimate credit counselor and another to an experienced bankruptcy attorney. Between the two, you'll get the information you'll need to decide whether you should continue paying your debt or have it "forgiven" by the U.S. bankruptcy court.

Mortgages. Gather your paperwork -- your mortgage documents, last year's tax return and some recent pay stubs -- and call a HUD-approved housing counselor to evaluate your situation and your options. If you qualify for a loan modification program, the counselor can help you get through to your lender's loss mitigation department, which will evaluate your application.

A lender will want evidence that you're in trouble -- and assurances that any changes will keep the payments coming. Don't expect that it will immediately hack your loan balance to what the house is currently worth; it won't.

Your lender has only a few ways to help you: It can reduce your interest rate, defer payments, extend the length of the loan or forgive some part of your principal.

With your counselor's help, you should decide what solution you want before approaching the lender. If you have a temporary situation such as an illness that will be resolved soon, for example, ask for deferred payments. If your adjustable-rate mortgage is about to reset, use MSN Money's Mortgage Calculator to see if a reduced interest rate could keep you in your home.

You may have trouble getting your lender's attention. That's particularly true if you haven't already fallen behind on your payments, something you should try to avoid, because late payments can kill your credit scores.

In that situation, consider getting an attorney's help, said lawyer and mortgage broker Alan Jablonski, author of "Successfully Navigating the Mortgage Maze" and operator of the AJ Consumer Watch Web site.

Unlike some of those who advertise loan modification help, attorneys have a fiduciary duty to put their clients first (and clients have many remedies, including lawsuits and disciplinary complaints to the bar association, if the attorney fails to fulfill those duties).

That's a far cry from many of the fly-by-night outfits that demand big upfront fees and then fail to act, or disappear with the money.

If you decide to hire an attorney, you'll have to find one on your own, Jablonski said; anyone legitimate has a full workload and isn't proactively contacting potential clients.

Your state's bar association may offer referrals. In any case, you'll need to confirm that the attorney is in good standing with the bar, and that he or she has experience with loan modification.

Liz Pulliam Weston's latest book, "Easy Money: How to Simplify Your Finances and Get What You Want Out of Life," is now available. Columns by Weston, the Web's most-read personal-finance writer and winner of the 2007 Clarion Award for online journalism, appear every Monday and Thursday, exclusively on MSN Money. She also answers reader questions on the Your Money message board.

Published Nov. 17, 2008

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