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Reader Q&A: Best Way to Negotiate Lower Payments & Avoid Bankruptcy?

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Q: Two months after I lost my job in 2009, I got divorced. I was unemployed for two years but started back to work this February. I have three credit card accounts with balances of about $10,000 each.

What is the best way to negotiate a lower payout balance and an affordable monthly payment before the credit card issuers write off my accounts as bad debts? I have a mortgage, high truck payments and utilities so I can’t see how I can pay on all three accounts.

I am considering bankruptcy but rather pay my debts off and rebuild my credit.

A: It sounds like it has been a rough couple of years. I am glad to hear you are back to work again, but I can imagine how tough it may be to catch up on all your bills. You don’t indicate how much you earn or how much you can afford to pay on each of these cards, but I can give you a good rule of thumb for determining your next step: Look at your credit card statements. Each one will give you the amount you need to pay each month in order to pay off the balance in three years. If you can’t afford to pay that amount each and every month without taking on new debt, then it’s probably time for you to reach out for help.

[Related Article: How a 3-Year Debt Payoff Plan Takes Twelve Years]

The first thing I would suggest you do is contact a credit counseling agency to find out whether they can help you with a Debt Management Plan that would allow you to pay these debts off in full. If they can’t help you, or if the monthly payment they propose is too high, then your next step would be to consider negotiating settlements on your debts or to file for bankruptcy. I would recommend you meet with a bankruptcy attorney and talk to a debt negotiation firm before you make your decision.

Although it sounds like you would like to be able to make smaller payments and pay back less than the amount you owe now, that’s not the way it works. Creditors don’t negotiate reduced balances while you are current on your payments. In other words, if you want to pay back less than the full balance, you typically must fall behind before your creditors will start to negotiate. I am not suggesting that’s what you should do—but I do want you to understand how it works.

[Related Guide: Learn How Debt Negotiation Works, Credit.com’s Consumer Guide to Debt Settlement]

And don’t rule out bankruptcy just because you are worried about the damage to your credit. If you decide that it’s the best option, you can begin rebuilding your credit as soon as it is completed. Focus on making the best decision for your financial future, and don’t let your fears of damaging your credit stop you if that’s what you have to do to get back on track.

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Image: iDanSimpson, Flickr.com

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