The simple answer is no, it is not as good as at sounds. If a company tells you that they can reduce the balance of your credit card debt by half then that means you are probably looking at debt settlement. So what is debt settlement?

Credit card companies are not going to give up on money that you owe them. If you have spent $10,000 on a credit card do you really believe that the creditor is just going to say “No Problem, just give me $5,000 and we can call it a day.” No, they want all of the money that you spent. So, when you get involved with a debt settlement company what is it exactly that they do?

The first thing that happens is that they start by having you send in a payment to them. Many of the settlement companies take your first payment and keep it as part of their fees. They continue to take your monthly payments and they do nothing with it. They hold on to your funds while your cards go further and fuarther past due. They do this because it helps with the settlement process. A creditor is not going to take less then full value on a debt if you are paying it as agreed. Why would they allow you to give them half of what you owe when you are making the payment each month? This causes the credit card balances to go up even further than where they started. Not only is there no payment going towards the interest that is being charged, but now you are being charged late fees, and possibly over limit fees if the card was already maxed out. As soon as you go more than 30 days past due the creditors start reporting that your card is delinquent to the credit reporting agencies and your credit score starts to drop.

After several months of missed payments, the creditors are now getting nervous. They know that you might not pay them anything and they would rather get some of their money back then no payment at all. This is where the settlement company will start negotiating with the creditor. The creditor will settle on the debt for an amount less than what is owed. This does lead to another problem. At this point, you have only been making payments for several months and creditors accept settlements as lump sum payments. This means that you more than likely have only enough money to pay off one creditor. What happens to the other creditors?

The other cards will continue to go further and further delinquent. At some point, they will be sent to a collections agency. When this happens, it becomes another negative on your credit report. The process will start over with the next creditor as they continue to hold your funds until they have enough money to settle with the next creditor. The process will continue this cycle until eventually all of the debts are paid. Where does that leave you?

First, let us look at your credit score. All of your accounts will go delinquent. Since 35% of your credit score is based on how well you make you’re agreed upon payments, this portion of your score will drop significantly. Next, negative items on your credit report will stay on your credit report for 7 years. So once the account has been settled, it will reflect on your credit report for the next 7 years. This can severely affect your ability to get credit for the next seven years. If you are able to get credit extended to you, you are going to pay a lot more in the form of higher interest rates. One of the other negatives about settlement is the tax implications. Any amount that is forgiven above $600 dollars is considered earned income and you can be taxed on it. If you had a $10,000 debt that was settled for $5,000, then you will be taxed as earning $4,400 of additional income.

There are times when settlements may be an option that is worth pursuing. You as the consumer need to be aware of all of the implications of choosing debt settlement as a way to pay off your debt. The best policy is to pay your debt as agreed. If you are in a situation where you can no longer pay your credit card debt then look for help from non-profit organizations that can help you pay your debt while providing you with the education and knowledge to help you not get in this situation again.

In 1994, less than 5 percent of all new home loans were subprime loans. Meaning you had to have great credit to buy a house. Most of these mortgages were 30-year fixed rate mortgages. This allowed the homeowner to know what their mortgage rate was going to be year after year. By the year 2006, 20 percent of home loans were subprime loans and they know represent $1.2 trillion dollars of outstanding loan mortgages. In 2006, 80% of the subprime home loans were 2/28 ARMs. They are called 2/28 ARMs because the first two years are set at a specific rate. Normally, this is a teaser rate and can be much lower than the normal market rate. After the first two years, the interest rate is reset to a new rate based on the current LIBOR rate. This causes the mortgage payment to significantly increase. The interest rate continues to be reset every 6 months. Most of these mortgages also have clauses in them stating that the rate cannot drop even if the LIBOR rate goes down. This means that those individuals with ARMs are going to keep paying more and more for their house.

When a majority of these subprime loans reset, homeowners found themselves in a very difficult situation. They now had a mortgage payment that is several hundred dollars more than where it began. This has caused many individuals to fall behind on their mortgage payments. According to estimates by the Center for Responsible Lending, they estimate that one out of every five subprime mortgages made in the years 2005-2006, will end in foreclosure. In total, they estimate that 2.2 million homes will be foreclosed from subprime loans originated between the years 1998-2006. Nationally, there were 246,000 foreclosures in August. This was a 36 percent increase versus July and a 115 percent increase over August of last year.

Many of the homeowners who got subprime loans in the years 1998-2004 were able to refinance their mortgages because of the significant appreciation in the value of their homes. Now the market has cooled and homes are not appreciating nearly as fast as they were several years ago. This leaves many homeowners who got in towards the end of the recent housing boom with little equity and little chance to refinance their homes. If they are able to refinance their home, it is usually in the same type or high-risk loan, which will only delay the inevitable. So what should homeowners do if they find that they can no longer afford their mortgage payment?

First, homeowners should contact their lender. In approximately 50 percent of cases, homeowners do not contact their lender when they begin to have financial difficulties. Lenders do not want to be property owners. Foreclosures are expensive to lenders because they lose money. Many lenders are willing to work with the homeowner in order to help them stay in the home. Many lenders will offer different types of loan modifications such as temporary or permanent interest rate adjustments, relaxing or extending loan terms, converting the loan from an ARM to a fixed mortgage, setting up repayment plans, or completing a short refinance or short sale.

Another option may be to seek housing counseling. There are many organizations, often times non-profit organizations, that assist individuals who find themselves facing a hardship because of their mortgage payment. They may be able to work with your lender on your behalf to find a solution to your situation. Often times they are able to help you reevaluate your budget and spending habits to see if there are other lifestyle changes that you can make. This would allow you to free up funds that can be used to pay your mortgage. Homeowners can also seek out credit counseling if they have unsecured debt on top of the mortgage payments. Credit counseling cannot help you lower your mortgage payments and they do not focus on your problem with the house, but they can work with you and any creditors that you may have unsecured debts with by placing you on a Debt Management plan. Debt Management can often times help you with your credit card debt, which in turn, can free up money to pay your mortgage. As a last resort, you may need to seek legal options.