Home > 2015 > Managing Debt

How I’m Digging Out of $222K of Divorce Debt Without Filing for Bankruptcy

Advertiser Disclosure Comments 0 Comments

Robert says his wife chose the worst possible time to ask for a divorce. “It was right at the beginning of the recession,” he says and the couple was already saddled with debt as well as an underwater home. “I just wanted to bury my head in the sand,” he says. “I didn’t want to look at bills.”

But with multiple credit card companies and two mortgage lenders clamoring for payment, Robert (who asked that we not use his full name since his divorce case is not yet final) knew he had no choice but to find a way out. He decided to “hit this head on” and has since made remarkable progress paying off his debt.

When Robert and his wife split up, their liabilities included:

  • $84,000 in negative equity on a first mortgage.
  • $70,000 in negative equity on a home equity line of credit
  • $8,800 on one credit card
  • $15,000 on another credit card
  • $9,700 on a credit union credit card
  • $18,000 in IRS debt
  • $17,000 to a flooring company

The grand total? $222,500.

By next year, he will be debt-free without filing for bankruptcy. Here’s how he did it.

Consider All Options

Robert talked with an attorney about filing for bankruptcy. But because of his income, he would have to file for Chapter 13 bankruptcy and make payments for several years. The attorney recommended he keep that option open in case he really needed it (if he became ill and had very high medical bills, for example).

Robert did, however, hire the attorney to advise him and assist him with some of the trickier negotiations. He points out that consumers who decide to go that route need to understand that once the creditor is told the debtor is represented by an attorney, the creditor won’t be able to negotiate directly with the debtor. Attorney’s fees can add up quickly. Robert handled most of the back-and-forth with creditors himself.

Staying Out of Court

There is a common misconception that as long as a consumer is paying “something” on a debt they can’t be sued, but that isn’t the case. Still, even though he was served with lawsuits from a couple of lenders, Robert was able to head them off by agreeing to make payments, and eventually settlements.

In fact, he was able to settle most of his debts for less than the full balance, except for the credit union debt which he chose to pay in full, a balance with one card issuer who wouldn’t negotiate which he also paid in full, and the flooring account which remains unpaid due to an unresolved dispute (and is beyond the statute of limitations at this point).

It was very important to him to avoid a judgment on his credit reports, so he tried to remain pleasant with the creditors he was negotiating with, and he found most wanted to avoid going to court as well. “But they will,” he notes, adding, “I saw many, many, many people there for debt settlement.”

He attributes much of his success to timing. He would make smaller payments on some debts while paying off others, which in turn freed up more money to pay toward remaining balances. “I basically negotiated with all of these people so that when one was paid off I could pay off another,” he says.

Don’t Forget About Taxes

Robert knew that canceled debt can result in a big tax bill when a lender files a 1099-C reporting the unpaid amount as “income.” He talked with a tax professional to see if he could avoid those taxes by claiming the insolvency or Mortgage Forgiveness Debt Relief Act exclusions, but he didn’t qualify. So when the lender for the home equity line of credit offered him a settlement he could live with, he asked them to postpone it until the following year so he could spread out the tax liability. (He made small payments in the meantime.) Still, the taxes he had to pay on canceled debt were steep and pushed him into another tax bracket. He wound up raiding part of his 401(k) savings to pay off the IRS.

Focus on the Debt

During this time, Robert remained frugal. If he went out to eat, it was likely with a coupon or for a lower-cost happy hour, for example. He didn’t buy new clothes, and “Christmas was a lot smaller,” he says.

While all this was going on, another driver caused an accident that totaled his car. He received $8,000 from the settlement and he used it to buy a used Kia Rio for cash. “I didn’t have a car payment for six years,” he says, and the Rio was a gas miser as well. That freed up money he could use to whittle away at his balances.

At one point, Robert says he was working three jobs to help pay his debts. Eventually, he says he burnt out on that, but it did help.

You Can Get Credit Again

“My credit before was over 700” when everything fell apart, he says. It dropped to 535 at one point. It’s now in the mid- 600s depending on which credit scoring model is used. “I went to buy my car two years ago and told them I didn’t have very good credit,” he says. “They had to run it through eight different places and got a car loan at 8%.”

On schedule to pay off his last remaining debt next year, Robert is starting to repair his credit. He was getting card offers, but assumed no one would actually give him one. When he finally applied, he was pleasantly surprised. He was granted a card with a $500 credit limit, and after making three on-time payments his limit was increased to $3,000. (Here’s a guide to credit cards for building credit.) But he’s much more cautious now about taking on debt and protecting his credit rating. (You can see where your credit scores stand for free every 30 days on Credit.com.)

He pays everything early. “I am one payment ahead on my car payment,” he says. “If you look at my payment history now I’ve paid (everything) on time in the last three years.”

Although he would never want to relive his ordeal, he learned a lot in the process.

“I survived and feel much better now that I am almost debt-free,” he says.

More on Managing Debt:

Image: iStock

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Certain credit cards and other financial products mentioned in this and other articles on Credit.com News & Advice may also be offered through Credit.com product pages, and Credit.com will be compensated if our users apply for and ultimately sign up for any of these cards or products. However, this relationship does not result in any preferential editorial treatment.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Our Owners

Credit.com is owned by Progrexion Holdings Inc. which is the owner and administrator of a number of business related to credit and credit repair, including CreditRepair.com, and eFolks. In addition, Progrexion also provides services to Lexington Law Firm as a third party provider. Despite being owned by Progrexion, it is not the role of the Credit.com editorial team to advocate the use of the company’s other services. In articles, reporters may mention credit repair as an option, for example, but we’ll also be sure to note the various alternatives to that service. Furthermore, you may see ads for credit repair services on Credit.com, but the editorial team isn’t responsible for the creation or implementation of those ads, anymore than reporters for the New York Times or Washington Post are responsible for the ads on their sites.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team