This is the fourth and final installment in a series of pieces for people who find themselves unable to continue to meet the minimum payments on credit cards and other bills, and who want to learn about what I sometimes refer to as “debt intervention” options. Don’t worry; this is not one of those interventions where friends, family and co-workers confront your budget. This is an effort to confront the issues yourself, and is mostly about getting informed enough to feel confident in your decisions to eliminate debt.
This series is largely based on my five-day email exchange with an actual reader, Beth (not her real name), who submitted detailed personal information.
This final piece focuses on all three of the options to resolve debt that I have discussed in the three previous articles with her so far — credit card consolidation, negotiating debts for less and bankruptcy. It is in this final piece that she makes her decision.
Weighing the Options
Here’s Beth’s email:
Michael, I can’t thank you enough for your answers. I spent the whole weekend reading your articles.
[Card issuer 1] brought up the blp (balance liquidation plan) and settlement in my 2nd and 3rd calls, and I haven’t called [card issuer 2] and [card issuer 3] to see what they say. My payments are all due this week but I want to save the money for the settlement and not pay another outrageous interest fee, however if I were to settle now I wouldn’t be able to make the payments in 90 days, I need 5-6 months, with that being said I’m seriously considering not making my payments this month, what are your thoughts?
I’ve never been late my whole life, but it seems a step back I need to take in order to move forward. I feel stuck in this situation where I can’t settle now and pay in 3 months but I also don’t want to make another payment paying interest when I could save the money towards the settlement. That leaves me with 1 option I didn’t want and that’s the no payment/late payment.
I’m still looking into the Chapter 7 bankruptcy, but finding a good attorney is an issue, also I just moved from Utah to Florida 2 months ago and spent many months overseas in the last 2 years when I was unemployed and I was making the minimum payment, so when it comes time to meet with a judge I don’t know if that would be an issue.
My reply back to Beth:
Your credit card interest rates are not all that outrageous. I see them regularly at twice the 13% average you have. But they are flat-out unaffordable given your current circumstances and the temporary income situation.
I would be a little surprised if you were able to get a good settlement from the card issuers in the early months of having missed payments. You say you need 5 to 6 months to be able to fund settlements. That is currently the amount of time suggested to go (when your credit card payments are not being made), to get to the most reasonable and flexible bank policies and targets for negotiating your debt.
It is not for me to tell you to stop paying your credit cards. I can say that you generally will not reach favorable settlement outcomes when you are current, or only barely behind with payments.
You mention being stuck where you cannot settle now and pay in 3 months. But that is what I am saying too. You generally cannot do that. Your payments generally need to be late more than 90 days, and often more than 150 days late, but not yet 180 days late, in order to optimize your results. It is sometimes better to settle certain accounts even later than 180 days.
In other words, it is not only OK that you have to wait several months without paying before you are prepared to settle the credit cards, it is actually how it works best.
I really do like the Chapter 7 option for you. You are fortunate to be in a position to legitimately consider the three mainstream options for resolving problem debts with credit card consolidation, debt negotiation and bankruptcy. I am not sure why you would be having a hard time locating an experienced bankruptcy attorney? You can do a bankruptcy attorney search by city or zip code; or use your local phone book. If it were me, I would not make my final decision to negotiate these bills down until I talked with at least one attorney about Chapter 7 bankruptcy.
Seeking Professional Guidance
Next, Beth commits to do what I find of major importance for virtually everyone I come in contact with whom needs a form of outside intervention to get relief from crushing debt. That is: calling professionals who offer no-cost consultation and who can provide detailed information about their flavor of debt relief.
Beth wrote back to say:
I called the hotline and an attorney is supposed to call me in a couple of days. Bankruptcy makes me feel uncomfortable, the whole thing about the 7-10 years on my report and everything else is intimidating for someone who has always kept payments current and had financial control their whole life up until 2-3 years ago. It sounds like bankruptcy would save me more than the other options and would be life saving, very tempting indeed, however I’m afraid there will be long-lasting consequences. Giving my info over the phone was already intimidating let alone the attorney and the whole process that follows.
I’m not sure if I should call the credit card consolidation counselor in the meantime or wait for the attorney first. I did call [card issuer 2] for the first time today, and they basically “suggested” me to be late at least a month and they would contact me to offer options. So I’ve decided that I’m not going to pay any of my cards this month. They also said to call a consumer credit counselor to see if they can help me.
To which I responded:
I completely understand your being anxious about talking about any of this with a bankruptcy attorney, or a credit counselor. It is normal to feel that way. But I can tell you it is also pretty normal to feel a sense of relief when you do talk things over with a professional from each of the mainstream debt relief options.
You will consult with the bankruptcy attorney, where I am confident you will be able to dispel some of the concerns you have about filing. You may choose not to file chapter 7, but that decision will be an informed one, which is what I believe people in this spot owe themselves.
I would call a credit counselor. The counseling agency you call about consolidating your credit cards is not as important as choosing the right debt negotiator, or attorney. Using a nonprofit agency to consolidate your bills into one lower payment (with lower interest rates and typically less than a five-year payoff plan), is really a matter of what you can qualify for, which all agencies can quote you and get within a couple dollars of each other. I would make that call as soon as possible, and with the mindset that you are gathering information, not enrolling in the debt management plan they will quote.
Working Through the Confusion & Fear
Beth wrote me back a brief message I have not included here because it rehashed much of what we covered in earlier parts of this article series. She admitted she had been reading so much that she was perhaps a little confused about her options.
I have found some confusion to be pretty normal at the beginning of the information gathering process. Especially if you are grabbing information from many different online resources and/or getting feedback from different people in your own circle of influence (friends and family).
Beth has yet to talk with a credit counselor, or a bankruptcy attorney, and also expressed some remaining confusion about the debt settlement process. She also finally fell in line with nearly all early-stage debt intervention consultations I have ever done, where she expressed sincere concerns about her credit scores and reports.
I am including much of my response to Beth, as it will hopefully drive home some important details.
I wrote back and said:
I know you have read so much to date, but I really think you need to read the following carefully.
Start with this article where I answer the question – What is debt settlement? Yes, it is the basics, but this is just the start. It’s part of an entire series on settling with your original creditors.
You have come up with the wrong impression of settling your credit cards in the time frame of being one to two months late. That is not going to happen. You need to wait typically until after your fifth payment has been missed in order to get the deals you need so that you can afford to pay them — or even for some credit card banks’ last-ditch policies to kick in — allowing you to settle at all.
About the damage settling debt does to your credit report… it is probably worse than you read about, and also not the big deal you read about. Here is an article about how your credit reports can bounce back after settlement.
Your credit scores take a hit, but recover in quick order (all things considered). I see many credit recoveries within two years of completing your settlements. (You can see how your debts are affecting your credit scores by checking them for free on Credit.com.)
This is not about your credit scores, though. This is about the affordability of your debt. Something has to give, and it will be your credit score. Simply put, you cannot afford to finance anything right now anyway, and when you are back on firm financial ground, credit and financing options will be available, or can be planned for.
Making the Decision
And finally, the last two emails Beth and I exchanged.
I’m going to follow your instructions and read the articles tomorrow just like you said. I understand that in my bad situation I need to focus on getting rid of the debt more than on my credit score.
I just called [card issuer 2] and they offered me 0% for 5 years:
2 cards combined = $11,035 currently min payment = $247, but could become 0% 5 years = $185.
I’m still leaning towards settlement… but the question now is:
• Do I miss payments for about 3-5 months and then negotiate a settlement? And let late payments impact my score, or
• Do I take the 0% for 5 years offer for now and in a few months negotiate a settlement? I would be saving a little and it goes toward my balance but I also understand I’m “wasting” money making payments when in reality my plan is settlement later.
To which I responded:
You could likely get the five-year plans from all three of your particular credit cards at either zero interest, like [card issuer 2] offered, or really close to it. You could enroll in the plans and run a tight budget until your work situation is more stable. But like you pointed out, that is $500 set aside for four months. That is $2,000 ready to deploy toward what could turn out to be the better path, settlement or bankruptcy, a few short months from now.
All of your specific creditors tend to offer hardship and balance liquidation plans for the first 30 to 60 days of nonpayment (even longer from time to time). You do not need to decide on that right away.
Hard Choices May Ultimately Be the Better Ones
Beth is in a financial situation that would be a whole lot different if her employment were reliable. I am encouraging Beth to look more seriously at debt negotiation and bankruptcy than credit card consolidation for two reasons:
- Statistically speaking, she would be better suited to one of those options instead.
- In more than 20 years, I’m saddened by the people I see who waste money and time on what they perceive to be the better path to take, but whom ultimately never took the time to get informed about any other alternatives.
Hopefully this series drives home that there is a need to research and get informed, and also to reach out and talk to professionals in the different debt relief options out there.
More on Managing Debt:
- 5 Tips for Consolidating Credit Card Debt
- The Best Way to Loan Money to Friends & Family
- Top 10 Debt Collection Rights