topic Re: To borrow or not to borrow? Charged-off student loans... in Rebuilding Your Credit

To borrow or not to borrow? Charged-off student loans...

Anonymous — Sun, 22 Mar 2015 14:43:08 GMT

Hello everyone! I just joined myFICO and it looks like I'll be able to learn a LOT on here!

My husband and I have recently been working to improve our creditworthiness after years of neglecting our financial responsibilities, and we hope to get ourselves into a position to obtain a mortgage within the next 4 years. We both have some major delinquencies that landed us in a pretty dark place (EQ 556 & 564 on 1/16/15) but over the last few months we have designed a budget, used our tax refund to resolve several collections accounts and pay off our open credit cards, and we arranged payment plans on closed credit card accounts that still have outstanding balances. Our scores have already jumped closer to 600-605 even though some of the positive status updates have not yet been reported to the credit bureaus. However, there is one issue that I'm not sure how to handle.

At the end of December 2014, I had 3 private student loans (totaling $33,000) charged-off by Key Bank after 120 days non-payment. I arranged a payment plan with their recovery department that will keep me out of court, but there are no rehabilitation programs available for these charge-offs and it is my understanding that the negative marks will remain on my credit report for 7 years even if I pay the balance in full. The bank has offered to settle the debt for 50% of the balance, though if I had this kind of money in the bank I wouldn't be in this position in the first place. I am weighing my options, and I would really appreciate some insight on which route is best:

1) Continue payments to the recovery department. This has the advantage of allowing the debt to sit at 0% interest while I make payments, and the debt will not be reported as "settled" to the credit bureaus. However, I will still be paying this debt when we start searching for a mortgage and I will ultimately have to pay the full balance.

2) Settle the debt by obtaining a separate loan (probably in about 6 months, and with a co-signer) for 50% of the balance. This has the advantage of cutting the balance in half, which I should be able to pay off before we start our search for a mortgage, and it would allow me to add an installment account to my credit report that I can keep in good standing. The disadvantage would be that the original debts would be listed as "settled" on my credit report, which obviously isn't attractive to lenders.

3) Resolve the debts by obtaining a loan for > 50% (maybe up to 100%?) of the full balance and request a pay-for-delete from Key Bank. This has the advantage of adding a good-standing installment account to my credit report, eliminating negative marks from these delinquencies, and avoiding any "settled" notation on my credit report. The major disadvantages of this route include the fact that I would still be paying on this debt when we search for a mortgage, and it will ultimately increase the amount that I owe/pay by A LOT because of outrageous interest rates.

I have done a fair amount of research on personal finances and credit management, but I honestly don't know how to handle this situation. Do lenders get very concerned about settlements that are over 3 years old? Any idea how each of these routes would impact my FICO score? I know this cannot be exactly calculated, but I imagine that 3 charge-offs does some real damage even after several years.

If I'm wrong about anything I said, please correct me! And if you know of any other way to manage the situation, I'm all ears!

Thanks in advance!

E

Re: To borrow or not to borrow? Charged-off student loans...

gdale6 — Sun, 22 Mar 2015 17:51:25 GMT

What is the DoFD of each of the COed accounts, this date is what sets the CRTP clock running. DoFD is generally viewed to be the 30 day late that precedes the CO.

Re: To borrow or not to borrow? Charged-off student loans...

Anonymous — Tue, 24 Mar 2015 21:59:12 GMT

The first major delinquency for all of them was in August 2014...so they will be on my report for a long time. Is this one of those situations where making a payment re-starts the clock?

Both my private loans and my federal loans are serviced by Great Lakes ELS. I submitted an electronic request for forbearance before these missed payments, and received a response email that said "your request for forbearance was approved!" along with a list of affected accounts. I only skimmed the message and did not realize that the forbearance was only applied to my federally subsidized loans. I'm sure Key Bank called me a lot (I used to screen any 800 numbers) but I never received any written warning about the impending charge-offs even though I know they have the correct mailing address.

I know this was ultimately my error, but none of the options I listed in my OP are particularly appealing so I guess part of me is hoping that I can resolve this issue some other way. I know that my rights as a lender are clearly described SOMEWHERE but I'm not familiar with them and google just keeps sending me to detailed information for rehabilitation of defaulted federal loans.

Any insight would be GREATLY appreciated!!! This is very frustrating!

Thanks,

E

Re: To borrow or not to borrow? Charged-off student loans...

Anonymous — Tue, 24 Mar 2015 22:13:26 GMT

Tread carefully with Key. My spouse and I are literally in the exact same situation (we were offered 75%, not 50%, though). Spouse was reading that Key is actively attempting to get out of the private SL business. All of the loans were CO'd, despite weekly calls to try to get the payments up to date. They sent us around and around with paperwork that went nowhere. We got one phone call two months ago right after the CO, and now no one can figure out "where" the loans are. Student loans sends us to recovery who says they don't have it. Great Lakes won't touch it anymore.

That being said, I don't think there is one "correct" answer here. I'd go for a PFD first, and settle if that isn't an option. Settled with a 0 balance looks better than an unattended, large balance.

Re: To borrow or not to borrow? Charged-off student loans...

Anonymous — Tue, 24 Mar 2015 22:16:52 GMT

@Anonymous wrote:
The first major delinquency for all of them was in August 2014...so they will be on my report for a long time. Is this one of those situations where making a payment re-starts the clock?

Both my private loans and my federal loans are serviced by Great Lakes ELS. I submitted an electronic request for forbearance before these missed payments, and received a response email that said "your request for forbearance was approved!" along with a list of affected accounts. I only skimmed the message and did not realize that the forbearance was only applied to my federally subsidized loans. I'm sure Key Bank called me a lot (I used to screen any 800 numbers) but I never received any written warning about the impending charge-offs even though I know they have the correct mailing address.

I know this was ultimately my error, but none of the options I listed in my OP are particularly appealing so I guess part of me is hoping that I can resolve this issue some other way. I know that my rights as a lender are clearly described SOMEWHERE but I'm not familiar with them and google just keeps sending me to detailed information for rehabilitation of defaulted federal loans.

Any insight would be GREATLY appreciated!!! This is very frustrating!

Thanks,

E

I would suggest you research how the FCBA (Fair Credit Billing Act) might apply here. If it applies here, use it for leverage to get them to settle for 50% with the agreement to mark it PIF.

Re: To borrow or not to borrow? Charged-off student loans...

Anonymous — Tue, 24 Mar 2015 22:56:21 GMT

I will definitely look into how that may apply, thanks!