This is part two of my series about Beth, who is dealing with unaffordable credit card bills. In part one, I shared her detailed reader question, and I didn’t know her personal debt relief quest would turn into an online mini-book. In the first installment, I covered why consolidating credit cards without a dependable income is often not a good use of limited resources.
If you are just starting out with researching your own path to manage problem debt, you may benefit from reading this series from the beginning.
More from Beth:
Hi Michael, I can’t thank you enough for your help. My friend wanted to show me some YouTube videos about credit card hardship plans and sure enough they were your videos, what a coincidence!
As of now I’m paying $625/month in credit cards (roughly 14% interest), I was stupid enough to use my savings and am just now looking for help. I could afford $550 but would be suffocating; the ideal would be around $450. I wanted to go with a BLP (a balance liquidation plan, which is a hardship payment plan offered by some creditors) first to save me time and interest for about 3-4 months until I find out if this job will turn into permanent and/or I get a second job.
I’m going to receive a bonus in two weeks and will have $3,100 saved already, they will let me work overtime in a couple of weeks and I may get a second job, by July I may be able to have saved around $4,500-$5,500, plus I can borrow money from my parents as soon as four months, but I’m trying to avoid that. So for now I’d like to stop paying outrageous interest and see what happens in four months, then maybe by July-August I could do a settlement only if it will save me a lot, or I’d rather wait until December-February. $12,000 is something I can afford in about four to five months if I absolutely have to, and most likely by early next year. I just can’t afford the $625/month with interest, and $30,000 debt is impossible to pay.
I could pull it off and come up with the money by December-February or as soon as five months and things could go really well in the next months, but even though I will have $3,100 saved in two weeks, the reality is that I’m desperate, I’ve never been in debt before, let alone a huge debt such as this one, my job is still a temp job, I don’t have health insurance and I’m taking the bus to work (I had two cars a few years ago), and I basically don’t have any social life anymore, I can’t afford to spend any money.
I had never heard of Chapter 7 bankruptcy before. The word bankruptcy scares me. It sounds good at first but too much of a hustle and I’d have to pay a lawyer… but would it be the best option? I’m not looking to buy a house or anything at all in the next few years, maybe a student loan in one to two years (maybe). I want to get rid of this huge debt and start over as soon as possible. I’m 34 years old; healthy; I’m starting all over at this new job working in customer relations for a travel business; making $13.50/hr (I was making $50k/year in 2012 …. when the department closed and [I] got laid off).
I’ve read several of your debt relief pages and will try to watch your videos, it’s been very helpful since I knew nothing about debt relief, but I still don’t know what to do. I still have many questions and want to make the best decision, here are a few questions I have to take into consideration:
- I’m still current with my payments and am trying to negotiate directly with the banks. This is the best approach correct? or should I fall behind payments or try to contact an agency for help (I really would like not to).
- As of now I’m thinking BLP first then settlement …is this possible? Is it a good idea?
- Say if I’m able to settle at 40% do I have to make a full payment right away, or do they give time/divide in payments?
- Do I have to call one company at a time … and try to negotiate?
- I’m so lost that I signed up for a [new] card but haven’t activated it yet, they gave me $5k limit and balance transfer for 18 months with 0% interest and a 3% balance transfer fee. Should I transfer some of the debt to [that] card? Probably transfer the [other card’s] $7,000, would transfer $5,000 to [the new card] and leave $2,000 paying interest at 14%. Or just do a blp and/or settlement for all cards?
Sorry about the long email, I’m trying to give you as much information as possible; my decision is going to be based on your advice.”
My Response to Beth
With the additional details you shared, I like the settlement option more than before. Finishing your settlements in fewer than 12 months puts you in great shape to avoid risks and get a really good reduction. You would likely be able to settle for less than what I estimated. I will often estimate higher by 5% to 10%.
You definitely have a skewed impression of bankruptcy. Read this article about interviewing and hiring a Chapter 7 bankruptcy attorney. I would strongly advise you to at least speak to an experienced bankruptcy attorney. I would hate for you to not look at the option based on some incomplete impressions.
You may not be able to qualify for student loans if you have filed for bankruptcy recently. That could mean your return to school would be delayed something like a year longer than you are looking at currently.
I will answer your questions in the same sequence you put them in:
- I would encourage you to speak to a credit counselor first and get a to-the-penny monthly payment quote. Working through a nonprofit counseling agency is generally preferred to working through this yourself.
- You can enroll in the one card’s balance liquidation plan and drop it later in order to negotiate a settlement. It is not that it is a bad plan, but that you are wasting money on payments when you would later settle the debt.
- If you settle with your bank early enough you can get the balance reduction with as much as 94 days to pay. In other words, a $3,000 settlement payment could be broken up into $1,000 payments over three months. If you settle later on with a debt collector there can be more flexibilities with payments, but the tradeoff can often be that you save less overall.
- You would need to call each bank and negotiate separately. That would go for hardship repayment plans, and for debt settlement.
- If it were me, I would not balance transfer any debt. That can often be a trap for someone in your situation. If I even kept the new card, I would activate it and put it in a drawer and not use it until all of the settlements were done. It would be good to have to rebuild your credit with later on.
In the next installment of the debt relief information guide, you will see Beth peppering me with very specific debt settlement questions, including what banks typically settle for, and whether it is a good idea to touch her 401k retirement savings in order to resolve her situation. Stay tuned…
More on Managing Debt:
- How to Pay Off Credit Card Debt
- 5 Tips for Consolidating Credit Card Debt
- Understanding Your Debt Collection Rights