I read some recent reports indicating that default rates on mortgages, especially “sub-prime” mortgages have jumped in the face of the slowing housing market. Credit card delinquencies, on the other hand, have not increased, as some had predicted. Defaults on credit card payments during the 4th Quarter of 2006 remained steady at 4.56%, as compared to 4.57% in the third quarter. In comparison, credit card default rates were around 5% back in June 2005.

This is interesting because usually people will struggle to make their mortgage payments at the expense of their payments to credit card companies. Logically, it would seem that credit card default rates would increase before mortgage default rates. That doesn’t appear to be what is happening right now.

I have also read news reports about mortgage companies tightening their money policies. In other words, it’s not as easy these days to get a mortgage or second mortgage as it used to just a year or two ago. I would think eventually we will start to see credit card default rates increasing because equity loans and equity lines of credit won’t be so readily available as an option to pay off unsecured debt, like credit cards. But, that doesn’t appear to be the case as of yet. I suspect it might have to do with the huge push in advertising of credit counseling firms touting debt management plans and debt settlements. I have no statistical data to support my opinion, but it just seems to me that I’m hearing a lot more commercials for these “not-for-profit” credit counseling agencies than I heard in years past. Unfortunately for consumers who need help paying debt, I don’t think these are good solutions. I’ve blogged before about reports from the credit counseling agencies that only approximately 25% of debt management plans complete. In my opinion a 25% completion rate doesn’t sound like success.

Redemption is a process that is sometimes misunderstood. Redemption is the process of paying a lump sum payment to a secured creditor (lienholder) in exchange for the release of the lien. In Chapter 7 bankruptcy, a debtor can use 11 U.S.C. Section 722 to pay only the fair market value for the collateral, not the contractual balance.

Usually this situation arises when a debtor is financing a vehicle. Vehicles depreciate. Sometimes they depreciate rapidly. Most people I counsel owe more on their vehicles than what the vehicles are worth. Through the redemption process, a debtor could save thousands of dollars on principal and interest payments because the debtor only has to pay the “value” which is usually less than the “balance” on the loan. For example, if the debtor’s car is worth $10,000, but the debtor owes $15,000, the debtor could use the redemption process under chapter 7 bankrutpcy and force the creditor to release its lien after receiving only $10,000.

It is important to realize that there isn’t a redemption process in chapter 13. This is only something that can be done in chapter 7. The “catch” in the process is that most debtors I counsel don’t have a lump sum of money equal to the value of the vehicle they can pay at once. Some debtors might be able to get the money from friends or family or borrow from a retirement asset, but even for those debtors who don’t have sources of cash, redemption is possible.

Believe it or not, debtors can sometimes borrow the money to fund the lump sum payment needed to redeem. There are finance companies that offer financing for debtors in these specific circumstances. While it may be true that these finance companies charge higher than average interest rates, depending on the value of the car and the terms of the original loan, these transactions can be very beneficial for debtors and still result in thousands of dollars of savings over the life of a loan and significantly lower vehicle payments each month.

If you’re in this situation, make sure any attorney you choose knows about this process and can offer representation regarding this process in chapter 7. It could save you thousands of dollars on top of what you are eliminating in medical, credit card and other unsecured debt!