When Should I Try to Settle on a Charged Off HELOC Loan?

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When a lender charges-off a home equity line of credit, it means that the lender has updated its records for accounting purposes to report the HELOC as a bad debt from which it does not expect to receive future income. On charged-off HELOCs, the debt remains on the lenders books, but it no longer appears as an income generating asset in the lender's loan portfolio. When your lender charges off your debt, it does not mean that you no longer have to repay the money, and for a number of reasons, you should attempt to settle the debt as soon as you can.

Nonrecourse

Many homeowners believe that if they fail to repay their mortgage or HELOC that their lender has only one course of action: foreclosure. In fact, foreclosure sales often fail to raise sufficient funds to cover the mortgage debt on a particular property and when this occurs in a nonrecourse state, your lender has to write off the rest of the loan balance. However, many states have recourse laws, which means that your lender can sue you to recover its losses in addition to foreclosing on your home. A lender could even go to court to have a lien placed on your new home.

Credit Score

Whenever you apply for credit your lender checks your credit report, and having a poor credit score can make it difficult to obtain credit. A charged-off HELOC remains on your credit score for seven years and has a negative impact on your credit report. Furthermore, prospective employers check your credit report and a charged-off HELOC could lead to you being passed over for jobs in the financial services industry or related fields. You may even have to pay more to take out insurance policies if you have a poor credit score. Therefore, a charge-off costs you money for as long as it remains on your credit report.

State Laws

Every state has its own laws with regard to debt collection. The statute of limitations sets boundaries on the time window within which your creditors can sue you, but state laws have no connection to the seven year limit on debts appearing on your credit report. Therefore, even after your HELOC charge off disappears from your credit report, your lender may still sue you if your state's statute of limitations allows for such action after seven years. Once your charge-off passes the statute of limitations end date, your lender cannot sue you but can continue to call you and send letters to you until you repay the debt.

Considerations

Many companies help debtors to settle unpaid debts, such as charged off HELOCS, with creditors but when you enter into such an arrangement the debt settlement firm charges fees that reduce the amount of your money that goes towards settling the debt. Furthermore, from a legal standpoint, you can do anything that a debt settlement firm can. So by working with one of these firms, you are involving a middle-man that ends up costing you money. You should always attempt to settle your debt directly with your creditors so that you keep any unpaid portion of the debt to a minimum.

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