Features

• A settlement refers to a debt payment arrangement in which you pay the lender a lump sum amount that is less than the full outstanding loan amount and the lender considers the loan paid off. A settlement gives you the ability to satisfy your debt obligations cheaply and minimize the negative impact of the delinquency on your credit. The lender also removes the lien on the property, so you will not lose your house through a second mortgage foreclosure.
  
  

Possibility

• A second mortgage lender can choose to allow a settlement, but he does not have to do so. The lender likely will accept a settlement only if you are facing financial problems and can't afford to pay your loan. The second mortgage lender is also more likely to agree to a settlement if your house value has dropped to a point where you owe more on your mortgages than your house is worth. In this situation, the second mortgage lender may not get anything from a foreclosure because the sale proceeds first go toward paying off the first mortgage. A settlement allows the second mortgage lender to limit his losses.
  
  

Funds

• A settlement involves making a lump sum payment to your second mortgage lender. Because the lender usually only agrees to a settlement if you are in financial distress, you may find it difficult to come up with the money. You could borrow the money from your friends or family if you are confident that doing so will not hurt your relationship. Alternatively, you can choose to withdraw the money from your retirement account, but you may have to pay penalties for an early withdrawal.
  
  

Warning

• Choosing to settle your second mortgage loan has several risks. You may have to stop making your mortgage payments to force your lender to negotiate with you. The lender may charge you late fees and report these missed payments to the credit bureaus. If you are using the services of a debt settlement company, you have to pay the company to manage your debts and keep any money you are saving for the settlement lump sum payment. Because the debt settlement industry does not have clear standards of practice, Bankrate recommends that you use hire an attorney from a reputable law firm instead.