Mr. Credit Card,
I lost my job six months ago and I haven’t been able to find another one. I have a lot of credit card debt (about $15,000 as well as a $20,000 car loan that is half paid off.) I’m not married, and I do not own a home. Up to this point I have had excellent credit. I’ve been scraping by and making the minimum payments where I can, but the money has almost gone. I moved back in with my parents, (which is horribly embarrassing as I’m 34) but it’s helping me work through the financial mess while I find a job. If I don’t find a job I’m considering bankruptcy. What are my options here? Would debt consolidation be better? Is there are way to avoid ruining my credit? I really don’t want to ask my parents for any more financial help. Also, I’m dating a wonderful man, and if we decide to get married I’d rather not bring bad credit into the relationship.
-Becky
Becky,
It is difficult to give you a concrete answer on which choice would be the best for your situation, so I will cover the options and hopefully it will help a little in deciding which scenario would be best for you.
First, if you are afraid of bringing bad credit into your relationship, you may not want to file bankruptcy unless it as an absolute last resort. It will take a couple years to start building your credit back afterwards and will remain on your credit report for up to 10 years. Some credit agencies will take it off after 7, but unless you don’t plan on getting married for at least 7 years, you will have a bankruptcy (and bad credit) on your report going in.
What Happens in a Chapter 7 Bankruptcy?
Chapter 7 Bankruptcy is most commonly declared by people that do not own a home. In your situation, your credit cards and debt will be discharged. You will most likely keep your car and will be able to reaffirm the loan which typically includes a lower interest rate and lower payments.
When to File Chapter 7
While we suggest talking to a qualified legal representative so that you understand all your options, we can give you the prevailing wisdom: It is often suggested to compile a list of all of your living expenses first. Include food and rent and reasonable expenses that are necessary. The good thing is that you are currently living with family and although it may seem embarrassing for you at the moment, this is a great opportunity to pay bills and maybe save a little. The list will also serve as somewhat of an alert. Are there expenses on your list that can be lowered or taken out? Can you spend less in any area? Remember, that the money that goes to unnecessary expenses can be used to pay on bills with creditors. You should try to take full advantage of the time living at home to not only get things in order but also pay off debt and save a little as well.
After you have your list of living expenses, calculate the payments of the current debts such as credit cards. If you cannot pay these off in the next 3 years, even after cutting down on living expenses, you may want to consider filing bankruptcy. First, however, contact the creditors and see if they can work with you on either the interest rates or payments. Sometimes, you may be able to qualify for a hardship program which can cut your monthly payments on the credit cards drastically.
Hardship Programs with Credit Cards
Most credit cards have hardship programs, though they are not heavily advertised programs. These programs can significantly lower your interest rates and lower your monthly payments. Sometimes the program can be set up for a set amount of time while other times it is set up for the entire balance remaining on the card. The downside is that your charging privileges may either be suspended or canceled entirely, but if you aren’t able to make your payments on the card, this would happen anyway. Usually, a hardship program is not reflected negatively on your credit report, it just shows that you are paying as agreed. Sometimes, especially if the creditor cancels the card, it may be reflected as closed by the creditor. This also does not always equate into a negative mark on your credit report, unless there are a number of late payments to accompany it. (But, late payments are negative marks anyway.) It is a good idea to ask the creditor how the hardship program will be reflected on your credit report.
The problem with hardship programs is that sometimes you will not qualify until you have actually missed payments, so this is something you want to consider as well.
Debt Consolidation
Debt consolidation companies are able to get your payments and interest rates lowered and then consolidate all of the payments into one payment per month. Debt consolidation does not typically affect your credit score, but if you settle and instead agree to a lower payoff through debt settlement, you could see a drop in your credit score. If you are in a debt consolidation program, a comment may appear on your report until it is paid off, but does not affect your credit score.
It would be difficult to choose whether you should try debt consolidation if you are unemployed. If you have no income, you will not be able to pay the monthly payment for the consolidation no matter how low it is. You could essentially consolidate your debt yourself without paying or going through a debt consolidation agency, by transferring balances to lower interest credit cards and paying off high interest cards if you have the funds.
If you are fairly sure that you won’t have an income for a while or will not have the money to pay any kind of payments, you will probably need to look into filing bankruptcy. Although you don’t want to enter a marriage with a bankruptcy on your credit report, if you file now, you may be able to repair your credit quite a bit by the time you are married. It will be on your credit report though, and will be something that you should discuss with your partner if you are fairly certain of this being a long term relationship.
Hope this helps, and good luck.
